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1934
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Check the appropriate box:
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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)
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<PAGE>
[Horizon Financial Corp. Logo]
June 19, 2000
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 25, 2000 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.
Please sign, date and return the enclosed proxy card. If you attend the
meeting and vote your shares at the meeting, please note the following:
1. If you are a shareholder of record and you have physical
possession of the stock certificates: You may vote in person even
if you have voted by proxy previously.
2. If your shares are held by a brokerage firm or other nominee, and
you want to vote in person at the meeting: Please contact your
broker or agent for a "Legal Proxy" from your brokerage firm and
bring the Legal Proxy to the meeting for voting. Without the
Legal Proxy, you will not be able to vote in person at the
meeting.
Your continued interest and support of the Corporation and Horizon Bank
are sincerely appreciated.
Sincerely,
/s/George W. Gust
George W. Gust
Chairman of the Board
<PAGE>
HORIZON FINANCIAL CORP.
1500 Cornwall Avenue
Bellingham, Washington 98225
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on July 25, 2000
NOTICE IS HEREBY GIVEN THAT the 2000 Annual Meeting of Shareholders
("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 25, 2000 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 three 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 7, 2000, 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 19, 2000
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.
<PAGE>
PROXY STATEMENT
OF
HORIZON FINANCIAL CORP.
1500 Cornwall Avenue
Bellingham, Washington 98225
(360) 733-3050
ANNUAL MEETING OF SHAREHOLDERS
July 25, 2000
-----------------------------------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Horizon Financial Corp. ("Horizon
Financial" or the "Corporation"), the holding company for Horizon Bank
("Horizon Bank" or the "Bank"), to be used at the 2000 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 25, 2000 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 19, 2000.
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 and for
the approval of the appointment of independent auditors.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
-----------------------------------------------
Shareholders of record as of the close of business on June 7, 2000
("Voting Record Date") 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 the Voting
Record Date the Corporation had 8,282,091 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. Pursuant to the
Corporation's Articles of Incorporation, shareholders are not permitted to
cumulate their votes for the election of directors. Votes may be cast for or
withheld from each nominee. Votes that are withheld and broker non-votes will
have no effect on the outcome of the election because directors will be
elected by a plurality of the votes cast.
If a shareholder is a participant in the Horizon Bank Employee Stock
Ownership Plan ("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 the close of business on the Voting Record Date. The
following table sets forth, as of the
<PAGE>
close of business on the Voting Record Date, information as to the shares of
the Common Stock beneficially owned by each director of the Corporation and by
all executive officers and directors of the Corporation as a group.
Number of Shares Percent of Shares
Name Beneficially Owned (1)(2) Outstanding
---- ------------------------- -----------
Beneficial Owners of More Than 5%
Dimensional Fund Advisors (3) 424,820 5.13%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Directors
Robert C. Diehl 36,926 0.45
Fred R. Miller 73,680 0.89
George W. Gust 162,810 1.97
Frank G. Uhrig 84,404 1.02
L. M. (Larry) Strengholt 104,355 1.26
Richard R. Haggen 1,239 0.02
Gary E. Goodman 1,188 0.01
Named Executive Officers(4)
V. Lawrence Evans(5) 181,157 2.19
Jack M. Daughters 76,521 0.92
All Executive Officers and
Directors as a Group (12 persons) 785,605 9.49
_______________
(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 the Voting Record Date.
(3) Based on an amended Schedule 13G dated December 31, 1999, filed with the
SEC that discloses sole voting and dispositive power as to 424,820
shares.
(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. Messrs. Evans and Daughters
were the Corporation's only "named executive officers" during the fiscal
year ended March 31, 2000. Mr. Evans serves as President and Chief
Executive Officer of the Corporation and the Bank. Mr. Daughters is
Executive Vice President of the Bank and was the former President and
Chief Executive Officer of Bellingham Bancorp, which the Corporation
acquired in June 1999. For further information regarding the acquisition
of Bellingham Bancorp, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisition."
(5) Mr. Evans is also a director of the Corporation.
2
<PAGE>
PROPOSAL I -- ELECTION OF DIRECTORS
-----------------------------------
The Corporation's Board of Directors consists of eight directors. The
Corporation's bylaws provide that directors will be elected for three-year
staggered terms with approximately one-third of the directors elected each
year. Three 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, Fred R. Miller and Gary E. Goodman, each for three-year
terms. Messrs. Diehl, Miller and Goodman are each current members of the
Board 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.
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(1) or Appointed Director(2) Expire
---- ------ ------------------------ -------
NOMINEES
--------
Robert C. Diehl 61 1976 2003(3)
Fred R. Miller 64 1984 2003(3)
Gary E. Goodman 52 1998 2003(3)
CONTINUING DIRECTORS
--------------------
George W. Gust 70 1976 2001
Frank G. Uhrig 69 1978 2001
L. M. (Larry) Strengholt 71 1985 2002
Richard R. Haggen 55 1994 2002
V. Lawrence Evans 54 1990 2002
------------
(1) As of March 31, 2000.
(2) Includes prior service on the Board of Directors of the Bank.
(3) Assuming the individual is elected or 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.,
an automobile dealership.
FRED R. MILLER is the retired and former owner and President of the
Skagit Bonded Collectors, Inc., Mount Vernon, Washington.
GARY E. GOODMAN is the refinery manager for the Tosco Refinery in
Ferndale, Washington.
3
<PAGE>
GEORGE W. GUST joined the Bank in 1975 and served as the Bank's Chairman
of the Board of Directors from August 1984 to July 1997. 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., a retail grocery chain.
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. He was elected Chairman of the Bank's Board of Directors in July 1997.
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 2000, the Board of Directors of the Corporation held eight 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 2000
fiscal year in its capacity as the Nominating Committee.
The Executive Committee of the Corporation is composed of Directors
Diehl, Evans, Gust and Miller. This Committee meets at least monthly to
advise management of the Corporation between meetings of the Board of
Directors. The Executive Committee met 12 times during the 2000 fiscal year.
The Audit Committee of the Corporation is composed of Directors Diehl,
Haggen and Strengholt. 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 2000 fiscal year.
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 two times during the 2000 fiscal
year.
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
4
<PAGE>
during the 2000 fiscal year. Members of the Bank's Board of Directors receive
an annual retainer of $9,000 and $400 for attendance at each Board meeting.
The Chairman of the Board receives an additional $400 per month. Directors
also receive $300 for each committee meeting attended held on the day of a
regular meeting or a special board meeting held by telephone conference call,
and $300 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 $400 per month. Employees of the Bank who are
also directors do not receive compensation for their attendance at any board
committee meetings.
EXECUTIVE COMPENSATION
----------------------
Summary Compensation Table. The following table sets forth the
compensation received by Messrs. Evans and Daughters. All compensation is
paid by the Bank.
<TABLE>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------------- ----------
Name and Other Annual All Other
Position Year Salary($) Bonus($) Compensation($)(1) Options(#) Compensation($)
-------- ---- --------- -------- ------------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
V. Lawrence Evans 2000 $174,000 $17,809 $ -- 5,000 $18,037(2)
President and Chief 1999 174,000 22,747 -- 10,000 17,127
Executive Officer of 1998 168,000 25,018 -- -- 19,136
the Bank and the Corporation
John M. Daughters(3) 2000 100,000 4,792 -- -- 9,290(4)
Executive Vice President
of the Bank
------------------
(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 $4,418 and to the Bank's Retirement Savings and
Investment Plan ("401(k) Plan") of $10,220.
(3) Compensation information for fiscal years ended March 31, 1999 and 1998 have been omitted as Mr.
Daughters was not an employee of the Bank or the Corporation.
(4) Includes contributions to the Bank's ESOP of $2,186 and to the Bank's Retirement Savings and
Investment Plan ("401(k) Plan") of $6,330.
</TABLE>
<TABLE>
Option Grant Table. The following table sets forth all grants of options to Messrs. Evans and
Daughters for the fiscal year ended March 31, 2000.
Individual Grants
-----------------------------------------------------------------------------
Potential Realizable Value at
% of Total Assumed Annual Rates of Stock
Options Price Appreciation for Option
Options Granted to Exercise Term
Granted Employees in Price Expiration --------------------------------
Name (#) Fiscal Year ($/Sh) Date 0%($) 5%($) 10%($)
---- ------- ------------ ------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
V. Lawrence Evans 5,000 28.6% $9.375 3/28/10 $ -- $375 $2,625
John M. Daughters -- -- -- -- -- -- --
</TABLE>
5
<PAGE>
<TABLE>
Option Exercise/Value Table. The following information with respect to options exercised during the
fiscal year ended March 31, 2000, and remaining unexercised at the end of the fiscal year, is presented for
Messrs. Evans and Daughters.
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired on Value at Fiscal Year End(#) at Fiscal Year End($)
-------------------------- -------------------------
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
V. Lawrence Evans -- $ -- 71,774 12,500 $43,696 $ --
John M. Daughters 47,950 250,729 -- -- -- --
</TABLE>
Employment Agreements. The Corporation and the Bank are parties to an
employment contract with Mr. Evans. 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 $174,000. 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 2000, Mr. Evans would have been
entitled to a cash payment equal to approximately $482,342 based on his
current annual compensation.
In connection with the acquisition of Bellingham Bancorp, the Corporation
and the Bank have entered into a three-year employment agreement with Mr.
Daughters. At each anniversary date, the Board of Directors may extend the
agreement for an additional year. Under the agreement, the current annual
base compensation for Mr. Daughters is $100,000, which is paid by the Bank.
In addition, Mr. Daughters 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. Daughters in the
event of his termination without cause. In the event of his termination,
without cause, Mr. Daughters, or his beneficiaries, would be entitled to
receive a payment sum equal to the amount of his base compensation otherwise
payable to him over the remaining term of the agreement.
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 $74,550, $36,000 and $33,430 in 2000, 1999 and 1998, 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.
6
<PAGE>
The executive compensation policy of the Corporation and the Bank is
designed to establish an appropriate relationship between executive pay and
the Corporation's and the Bank's annual and long-term performance, long-term
growth objectives, and their ability to attract and retain qualified executive
officers. The principles underlying the program are:
. To attract and retain key executives who are vital to the long-term
success of the Corporation and the Bank and are of the highest
caliber;
. To provide levels of compensation competitive with those offered
throughout the financial industry; and
. To motivate executives to enhance long-term shareholder 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 annual salary for V. Lawrence Evans was unchanged for fiscal 2000, at
$174,000. The annual salary for John M. Daughters for fiscal 2000 was
$100,000. The bonus paid to Messrs. Evans and Daughters is based on the
profitability of the Bank, using the same formula that applies to all
employees vested in the Bank's cash profit sharing program. The Compensation
Committee believes that Messrs. Evans' and Daughters' compensation, and
management compensation levels as a whole, appropriately reflect the
application of the Corporation's and the 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 Directors George
W. Gust, Robert C. Diehl and Fred R. Miller. During fiscal 2000, there were
no compensation committee interlocks between the Corporation and any other
entity.
7
<PAGE>
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.
[graph appears here]
[data for graph:]
Period Ending
---------------------------------------------------------
Index 03/31/95 03/31/96 03/31/97 03/31/98 03/31/99 03/31/00
------------------------------------------------------------------------------
Horizon Financial
Corp. 100.00 103.68 141.51 206.41 151.72 107.02
NASDAQ - Total US* 100.00 135.80 150.95 228.88 309.19 574.04
SNL Western Thrift
Index 100.00 145.37 207.96 339.36 282.47 210.46
SNL Securities LC (804) 977-1600
@2000
*Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 1999. Used with permission. All rights
reservered. crsp.com.
8
<PAGE>
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 SEC 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, 2000 all filing requirements applicable to its reporting officers,
directors and greater than 10% shareholders were properly and timely complied
with, except for Mr. John M. Daughters' reports on Forms 3 and 4. Mr.
Daughters, a director and executive officer of the Bank, filed an initial Form
3 on November 30, 1999 that should have been filed by July 10, 1999.
Subsequently, Mr. Daughters filed a Form 4 on November 30, 1999 for stock
purchases that should have been filed by September 10, 1999; and a Form 4 on
March 24, 2000 for stock purchases that should have been filed by February 10,
2000 and stock sales that should have been filed by March 10, 2000.
TRANSACTIONS WITH MANAGEMENT
----------------------------
Under federal law, officers and directors of the Bank are generally
prohibited from receiving any loan or extension of credit at other than market
rates and terms.
AUDITORS
--------
Moss Adams LLP served as the Corporation's auditors for the 2000 fiscal
year. The Board of Directors currently anticipates appointing Moss Adams LLP
to be its auditors for the 2001 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 telephone at their
regular salary or hourly compensation.
The Corporation's 2000 Annual Report to Shareholders has been mailed to
all shareholders of record as of the Voting Record Date. 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and its
subsidiary. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes contained herein.
Forward Looking Statements
--------------------------
Management's Discussion and Analysis and other portions of this report
contain certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing Horizon Financial to the protections of such safe harbor
provisions of said Act with respect to all "forward looking statements."
Horizon Financial has used "forward looking statements" to describe future
plans and strategies, including expectations of Horizon Financial's potential
future financial results. Management's ability to predict results or the
effect of future plans and strategies is inherently uncertain. Factors that
could effect results include, but are not limited to: the future level of
interest rates, industry trends, general economic conditions, loan delinquency
rates, and changes in state and federal regulations. These factors should be
considered when evaluating the "forward looking statements" and undue reliance
should not be placed on such statements.
General
-------
Horizon Financial was formed under Washington law on May 22, 1995, and
became the holding company for Horizon Bank, effective October 13, 1995.
Effective June 19, 1999 the Corporation completed the acquisition of
Bellingham Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham,
was merged with and into Horizon Bank. At March 31, 2000, the Corporation had
total assets of $713.9 million, total deposits of $564.3 million and total
equity of $95.9 million. The Corporation's business activities generally are
limited to passive investment activities and oversight of its investment in
the Bank. Accordingly, the information set forth herein, including the
consolidated financial statements and related data, relates primarily to the
Bank and its subsidiary.
The Bank was organized in 1922 as a Washington State chartered mutual
savings and loan association and converted to a federal mutual savings and
loan association in 1934. In 1979, the Bank converted to a Washington State
chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC"). On August 12, 1986, the Bank
converted to a state chartered stock savings bank under the name "Horizon
Bank, a savings bank". The Bank became a member of the Federal Home Loan Bank
("FHLB") of Seattle in December 1998. Effective March 1, 2000, the Bank
changed its name to its current title, "Horizon Bank".
The Bank's operations are conducted through 16 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington. The acquisition of Bellingham Bancorporation increased Horizon
Financial's and Horizon Bank's presence in Whatcom County. During fiscal
2000, the Bank opened an additional office in Whatcom County, located in the
Barkley Village area of Bellingham, in the northeast portion of the city. In
addition to serving the growing population in this area, this new office
(approximately 15,000 square feet) serves as an operation center to support
additional growth for the Corporation. The Bank also completed construction
of a new office building at Murphy's Corner near Mill Creek, which replaced
the Bank's leased location in that area. During fiscal 2000, the Bank
purchased a bank site in Marysville, which will provide additional growth
opportunities. The Bank's management continues to research sites for future
development, with emphasis on locations in the growing Snohomish County
markets.
At its January 19, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 863,000 shares) of the Corporation's
outstanding Common Stock over a 24 month period. During the fiscal year ended
March 31, 2000, the Corporation repurchased 366,000 shares of its Common
Stock, compared to the repurchase of 13,900 shares of Common Stock during the
prior year. The Corporation had authorized a repurchase
10
<PAGE>
plan in March 1998, which plan was rescinded by the Board of Directors
effective January 18, 1999, with the signing of the definitive agreement to
merge with Bellingham Bancorporation, as discussed below.
Acquisition
-----------
On June 19, 1999, the Corporation completed the acquisition of Bellingham
Bancorporation, a Washington corporation, headquartered in Bellingham,
Washington. The acquisition was accomplished in an all stock transaction
valued at approximately $15.5 million, including the assumption of outstanding
Bellingham Bancorporation stock options and warrants. The Corporation
exchanged 2.74 shares of its Common Stock for each Bellingham Bancorporation
share. In this regard, Horizon Financial issued approximately 1,129,264
shares of its Common Stock in the transaction. The acquisition was accounted
for as a pooling of interests.
Prior to the acquisition, Bellingham Bancorporation was a $64.3 million,
bank holding company for the Bank of Bellingham, its primary subsidiary. The
Bank of Bellingham was founded in 1992 by a group of local business people for
the purpose of providing commercial banking services to the local community,
and operated three full-service banking facilities in Bellingham.
Operating Strategy
-------------------
The primary business of the Bank is to acquire funds in the form of
savings deposits and wholesale funds, and to use the funds to make consumer,
real estate and commercial loans in the Bank's primary market area. In
addition, the Bank invests in U.S. Government and federal agency obligations,
mortgage-backed securities, and municipal securities. The Bank intends to
continue to fund its assets primarily with retail deposits, although FHLB
advances, and other wholesale borrowings, may be used as a supplemental source
of funds.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Bank's
profitability is also affected by the level of other income and expenses.
Other income includes income associated with the origination and sale of
mortgage loans, loan servicing fees and net gains and losses on sales of
interest-earning assets. Other expenses include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses and other operating costs. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to commercial lending,
home mortgage lending, consumer lending, small business lending and providing
quality financial services to local personal and business customers. The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities, subsequent to its acquisition of a commercial bank in 1999;
(ii) continued efforts towards the origination of residential mortgage loans,
including one- to- four family residential construction loans; (iii) providing
high quality, personalized financial services to individuals and business
customers and communities served by its branch network; (iv) selling fixed
rate mortgages to the secondary market on a servicing-retained basis, thereby
increasing the loan servicing portfolio and income; (v) improving asset
quality; (vi) containing operating expenses; and (vii) maintaining capital in
excess of regulatory requirements combined with prudent growth.
Results of Operations
---------------------
Total consolidated assets for the Corporation as of fiscal year-end March
31, 2000 were $713,914,043, an increase of 6.85% from $668,116,102 at March
31, 1999. This increase in assets was due primarily to the growth in loans
receivable, which increased 10.48% in fiscal 2000 to $589,583,539 from
$533,649,169 in fiscal 1999.
11
<PAGE>
The Bank sold $13,378,358 of real estate loans in fiscal 2000, compared
to $72,859,940 in fiscal 1999. The Bank sells real estate loans during
periods of increased loan volume to improve the Bank's cash flow and to manage
its interest rate risk profile. In addition to these cash sales, the Bank
securitized $15,851,825 in long term, fixed rate mortgages during fiscal 2000
compared to $36,830,692 in fiscal 1999. These securitizations shifted loans
from loans receivable into the investment portfolio, which enhanced the Bank's
liquidity position and decreased the credit risk associated with the loans
receivable. These securitizations also provided the Bank with collateral to
borrow wholesale funds in the reverse repurchase markets.
Total liabilities were $617,979,052 at March 31, 2000, an increase of
8.10% from $571,675,121 at March 31, 1999. The increase in liabilities was
due in large part to the growth in deposits, which increased 5.01% in fiscal
2000 to $564,327,085 from $537,389,845 in the prior year. In addition, the
Bank's balance sheet included $39,853,000 in other borrowings at March 31,
2000, compared to $22,718,151 at March 31, 1999. During the year, the Bank
increased the size of its balance sheet with borrowings from the FHLB and with
other wholesale market borrowings.
Shareholder equity in fiscal 2000 decreased 0.52% to $95,934,991 from
$96,440,981 at fiscal 1999 year end. This decrease was due primarily to the
purchase of 366,000 shares of treasury stock for $3,690,810. The Corporation
remains strong in terms of its capital position, with a shareholder
equity-to-assets ratio of 13.44% at March 31, 2000, compared to 14.43% at
March 31, 1999.
Net Interest Income. Net interest income in fiscal 2000 was $23,690,385,
a 3.67% increase from fiscal 1999 of $22,852,162, compared to $21,753,873 in
fiscal 1998. Total interest income increased in fiscal 2000 to $49,947,277, a
3.80% increase from fiscal 1999 of $48,119,292, compared to $45,744,606 in
fiscal 1998.
Interest income on loans in fiscal 2000 was $43,881,883, a 4.86% increase
from $41,848,137 in fiscal 1999, compared to $39,364,962 in fiscal 1998. The
increases in fiscal 2000 and 1999 were due primarily to an overall growth in
loans receivable.
Interest and dividends on investments and mortgage-backed securities was
$6,065,394 in fiscal 2000, a 3.28% decrease from $6,271,155 in fiscal 1999,
compared to $6,379,644 in fiscal 1998. The decrease in fiscal 2000 was
primarily due to a decrease in the size of the Bank's investment portfolio.
The decrease in fiscal 1999 was primarily due to the lower level of interest
rates during the year.
Total interest expense in fiscal 2000 increased to $26,256,892, a 3.92%
increase over fiscal 1999 of $25,267,130, compared to $23,990,733 in fiscal
1998. Interest on deposits increased 0.26% in fiscal 2000, to $24,611,084
compared to $24,546,781 in fiscal 1999, and $23,942,701 in fiscal 1998. This
slight increase in fiscal 2000 occurred while the Bank's deposit base
increased by 5.01%, however, much of this increase in the Bank's deposits
occurred late in the fiscal year. The low interest rate environment early in
fiscal 2000 was favorable to the Bank's cost of savings as a significant
portion of the Bank's savings accounts re-priced during the year. In
addition, the Bank was successful in increasing its overall checking deposits
during the year, which represent a low interest rate source of funds for the
Bank.
Interest on borrowings increased to $1,645,808 in fiscal 2000, compared
to $720,349 in fiscal 1999, and $48,032 in fiscal 1998, as the Bank continued
to borrow funds in the wholesale markets in order to further leverage its
balance sheet and better manage its interest rate risk profile.
Provision for Losses on Loans. The provision for losses on loans
decreased in fiscal 2000 to $437,234 from $484,500 in fiscal 1999 and
$520,500 in fiscal 1998. These figures include both specific and general
reserves. As of March 31, 2000, the allowance for loan loss reserves was
$4,757,152. The general and specific reserves as of March 31, 2000 represent
0.81% of loans receivable, compared to 0.84% as of March 31, 1999 and 0.85% at
March 31, 1998. The Bank's management considers this to be an adequate level
of reserves at this time.
12
<PAGE>
As of March 31, 2000, there were eight loans in the Bank's portfolio over
90 days delinquent, with balances totaling $911,729, which represented 0.13%
of total assets. This represents an increase from $383,000 in delinquent loan
balances or 0.06% of assets at March 31, 1999.
Non-Interest Income. Non-interest income in fiscal 2000 was $2,851,189,
a decrease of 10.19% from fiscal 1999 of $3,174,824, compared to $2,267,605 in
fiscal 1998. Service fee income was $1,895,482 in fiscal 2000, a 2.18%
decrease from fiscal 1999 of $1,937,808 in fiscal 1999, compared to $1,459,711
in fiscal 1998. The primary reason for the decrease in fiscal 2000 was due to
the change in other non-interest income, which decreased 31.50% to $867,715
from $1,266,814 in fiscal 1999, compared to $738,023 in fiscal 1998. One
significant reason for this difference relates to the sale of mortgage
servicing rights. Prior to the merger with Horizon Bank, the Bank of
Bellingham's mortgage division sold its mortgage servicing rights at the time
it sold loans in the secondary market. Horizon Bank, however, retains the
servicing rights on the loans it sells, which defers income into future
quarters as servicing fee income. The increase in fiscal 1999 was due in
large part to increases in servicing fee income from loans sold in the
secondary market, along with increased fee income (e.g. escrow and appraisal
fees) related to the increased loan origination activity for the year.
The net gain/(loss) on sale of loans decreased to ($97,026) in fiscal
2000, from ($359,130) in fiscal 1999, compared to ($356,668) in fiscal 1998.
When the Bank sells loans, the gains or losses related to the loan balances
and the prices received in the secondary market are reflected as non-interest
income. When the Bank sells low coupon, long-term fixed rate mortgages to
reduce its interest rate risk exposure, the non-interest income portion of the
income statement may show a loss, as has been the case in the past three
fiscal years. The remaining outstanding fees associated with these mortgages,
however, flow to the income statement as interest income. Therefore, even
when the non-interest income portion of the sale reflects a loss, it is
possible that the loan sales (including the fee recognition) generate an
overall profit to the Bank. For example, in fiscal 2000, the fees recognized
from loan sales exceeded the losses from the sale of these loans by $67,060.
The net gain on sale of investments decreased to $185,018 in fiscal 2000,
compared to $329,332 in fiscal 1999, and $426,539 in fiscal 1998. These
differences were due to the varying amounts of gains recognized from the sale
of investments and common stocks in each of these years.
Non-Interest Expense. Non-interest expense in fiscal 2000 increased to
$13,243,789, a 16.62% increase from fiscal 1999 of $11,356,722, compared to
$9,934,356 in fiscal 1998. Compensation and employee benefits increased
20.54% in fiscal 2000 to $6,761,018 from $5,609,141 in fiscal 1999, compared
to $5,098,544 in fiscal 1998. The increase in fiscal 2000 is primarily due to
a declining amount of FAS 91 (the Financial Accounting Standards #91)
contra-employment benefit recognition. FAS 91 requires that the Bank
recognize a portion of each loan fee as an offset to employee compensation
expense incurred during the period that each loan is originated. During
periods of high refinance activity, compensation expense appears lower than
one might otherwise expect, due to this offset. Slower loan periods often
cause compensation expenses to appear higher. Loan originations for fiscal
2000 were significantly lower than in fiscal 1999. As a result, the Bank's
FAS 91 offset declined to $404,713 for fiscal 2000, compared to $767,038 for
fiscal 1999. The net effect of this change was a smaller deduction to the
employee compensation and benefit expense for fiscal 2000 compared to fiscal
1999, resulting in a higher overall expense. Also contributing to the
increase in compensation and employee benefits during fiscal 2000 were
expenses related to the Bank's deferred compensation plan and growth in
personnel in the Bank's commercial division. The increase in fiscal 1999 was
primarily due to the overall growth of the Bank.
Building occupancy expense was $2,201,486 in fiscal 2000, a 29.14%
increase from $1,704,764 in fiscal 1999, compared to $1,470,961 in fiscal
1998. Factors contributing to this increase include: a new office in
Bellingham opened November 1999; a new office in Edmonds, opened in March
1999; a new office in Murphy's Corner, opened in February 2000; and
considerable technology upgrades implemented over the past year, including the
replacement of most of the personal computers at the Bank, and the
installation of a wide area network.
13
<PAGE>
Other non-interest expenses increased 2.73% to $2,760,783 in fiscal 2000,
from $2,687,500 in fiscal 1999, compared to $2,069,206 in fiscal 1998. The
increase in fiscal 2000 was due in part to additional legal and professional
expenses related to the merger of Bellingham Bancorporation, along with legal
fees related to trade-name infringement.
Data processing expenses increased in fiscal 2000 to $914,417 from
$834,513 in fiscal 1999, compared to $824,030 in fiscal 1998. The increase in
fiscal 2000 was due in large part to fees charged for the termination of the
Bank of Bellingham data processing provider, and the subsequent conversion to
the Bank's data processor.
Advertising and marketing expenses increased 16.37% to $606,085 in fiscal
2000 from $520,804 in fiscal 1999, compared to $471,615 in fiscal 1998. This
increase in fiscal 2000 is due in large part to the Bank's additional
marketing efforts to communicate its expanded commercial product lines and
services, following the merger with the Bank of Bellingham.
Provisions for Income Tax. Income tax expense decreased to $4,180,040 in
fiscal 2000, from $4,843,562 in fiscal 1999, compared to $4,598,207 in fiscal
1998. The Bank's effective tax rate was approximately 34% in each of the past
three fiscal years.
Net Income. Annual earnings of $8,680,511 for fiscal 2000 represent a
7.08% decrease from fiscal 1999 earnings of $9,342,202, compared to fiscal
1998 earnings of $8,968,415. Basic earnings per share for 2000 were $1.02 on
weighted average shares of 8,507,050, compared to basic earnings per share of
$1.10 on weighted average shares of 8,469,898 in fiscal 1999 and basic
earnings per share of $1.07 on weighted average shares of 8,407,150 in fiscal
1998.
Yields Earned and Rates Paid
----------------------------
The Bank's pre-tax earnings depend primarily on its net interest income,
the difference between the income it receives on its loan portfolio and other
investments and its cost of money, consisting primarily of interest paid on
savings deposits, and other borrowings. Net interest income is affected by
(i) the difference between rates of interest earned on its interest-earning
assets and rates paid on its interest-bearing liabilities ("interest rate
spread") and (ii) the relative amounts of its interest-earning assets and
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. Thrift institutions have traditionally used
interest rate spreads as a measure of net interest income. Another indicator
of an institution's net interest income is its "net yield on interest-earning
assets" which is net interest income divided by average interest earning
assets.
14
<PAGE>
<TABLE>
The following table presents at the date and for the periods indicated, the total dollar amount of
interest income and interest expense, as well as the resulting yields earned and rates paid.
At March 31, Year Ended March 31,
--------------- ---------------------------------------------------------------------------
2000 2000 1999 1998
--------------- ----------------------- ------------------------ -----------------------
Average Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ----- ------- -------- ----- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans
receivable...$589,584 7.92% $553,803 $43,882 7.92% $503,835 $41,848 8.20% $459,461 $39,365 8.57%
Investment
securities... 21,019 7.44 29,790 2,216 7.44 42,930 2,520 5.87 50,336 3,290 6.53
Mortgage-backed
securities... 61,224 6.36 60,556 3,849 6.36 57,721 3,751 6.50 47,158 3,090 6.55
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning
assets....... 671,827 7.73 644,149 49,947 7.73 604,486 48,119 7.82 556,955 45,745 8.21
Interest-bearing
liabilities:
Deposits....... 564,327 4.53 531,550 24,611 4.53 515,746 24,547 4.76 483,691 23,943 4.95
Borrowings..... 39,853 5.64 29,192 1,646 5.64 14,633 720 4.92 689 48 6.97
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing
liabilities.. 604,180 4.59 560,742 26,257 4.59 530,379 25,267 4.76 484,380 23,991 4.95
-------- ------- -------- ------- -------- -------
Net interest
income........ $23,690 $22,852 $21,754
======= ======= =======
Interest rate
spread........ 3.14% 3.20% 3.26%
Net yield on ---- ---- ----
interest-earning
assets........ 3.65% 3.78% 3.91%
---- ---- ----
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.... 114.87% 113.97% 114.98%
====== ====== ======
</TABLE>
15
<PAGE>
<TABLE>
Rate/Volume Analysis
--------------------
The table below sets forth certain information regarding changes in interest income and interest expense
for the Bank for the periods indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in volume (change in volume
multiplied by old rate); (2) changes in rates (change in rate multiplied by old volume); (3) changes to
rate-volume (changes in rate multiplied by the change in volume); and (4) the total changes (the sum of the
prior columns).
Year Ended March 31,
-------------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998 1998 vs. 1997
--------------------------- --------------------------- ---------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
--------------------------- --------------------------- ---------------------------
Rate/ Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and
fees on
loans.........$4,239 $(2,006) $(199) $2,034 $3,788 $(1,190) $(115) $2,483 $1,770 $218 $ 10 $1,998
Investment
securities
and other
interest-
bearing
securities.... (384) 198 (20) (206) 212 (310) (10) (108) 845 127 20 992
------ ------ ----- ------ ------ ------- ----- ------ ------ ---- ---- ------
Total interest-
earning
assets........$3,855 $(1,808) $(219) $1,828 $4,000 $(1,500) $(125) $2,375 $2,615 $345 $ 30 $2,990
====== ======= ===== ====== ====== ======= ===== ====== ====== ==== ==== ======
Interest
expense:
Deposit
accounts......$2,251 $(2,078) $(109) $ 64 $1,580 $ (915) $ (61) $ 604 $1,463 $134 $ 9 $1,606
Borrowings..... 715 105 105 925 972 (14) (286) 672 5 6 1 12
------ ------ ----- ------ ------ ------- ----- ------ ------ ---- ---- ------
Total
interest-
bearing
liabilities...$2,966 $(1,973) $ (4) $ 989 $2,552 $ (929) $(347) $1,276 $1,468 $140 $ 10 $1,618
====== ======= ===== ====== ====== ======= ===== ====== ====== ==== ==== ======
</TABLE>
16
<PAGE>
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, 2000, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $27,288,090.
As of March 31, 2000, the total book value of investments and
mortgage-backed securities was $76,988,646, compared to a market value of
$77,951,531 with an unrealized gain of $962,885. On March 31, 1999, the book
value of investments and mortgage-backed securities was $94,591,302, compared
to a market value of $99,735,787 with an unrealized gain of $5,144,485. The
Bank foresees no factors that 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 adequate at this time. If additional
liquidity is needed, the Bank's options include, but are not necessarily
limited to: 1) Selling additional loans in the secondary market; 2) Entering
into reverse repurchase agreements; 3) Borrowing from the FHLB of Seattle; 4)
Accepting additional jumbo and/or public funds deposits; or 5) Accessing the
discount window of the Federal Reserve Bank of San Francisco.
Shareholder's equity as of March 31, 2000 was $95,934,991 or 13.44% of
assets, compared to $96,440,981 or 14.43% of assets at March 31, 1999. The
Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well capitalized. The Bank's total
risk-adjusted capital ratio as of March 31, 2000 was 22.73%, compared to March
31, 1999 of 25.35%. These figures are well above the well-capitalized minimum
of 10% required by the FDIC.
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Bank's largest component of market risk continues to be interest rate
risk. Currently, the Bank's assets and liabilities are not directly exposed
to foreign currency or commodity price risk. At March 31, 2000, the Bank had
no off-balance sheet derivative financial instruments, nor did it have a
trading portfolio of investments.
One method of analyzing an institution's interest rate risk position is
an interest rate sensitivity GAP analysis. The interest rate GAP is defined
as the difference between the amount of interest-earning assets maturing or
repricing within a specific time period, and the interest-bearing liabilities
maturing or repricing within that same time period. A GAP is considered
positive when the amount of interest rate sensitive assets exceeds the amount
of interest rate liabilities during the same period. A GAP is considered
negative when the amount of interest sensitive liabilities exceeds the amount
of interest sensitive assets. At March 31, 2000, the Bank's one year GAP
position was a negative 35.40%, compared to a negative 33.70% at March 31,
1999. The Bank has historically been considered liability sensitive with its
negative GAP position, due to the assumption that its liabilities (primarily
comprised of certificates of deposit) would reprice more rapidly than its
assets (which are primarily longer term mortgages). For example, in a rising
rate environment, the Bank's cost of savings should rise more rapidly than its
yield on its mortgages, as these liabilities reprice more rapidly than the
Bank's assets. The result to the Bank's operation in a rising rate
environment should be a compression of its net interest margin, which is the
primary factor currently affecting the Bank's income statement. Conversely,
in a falling rate environment, the Bank's liabilities should re-price more
rapidly than its assets, resulting in an improvement in its net interest
margin. Other factors, such as prepayments on mortgages and investments, the
interest rate sensitivity of deposits, and general economic conditions can
also have significant effects on the Bank's performance in a changing interest
rate environment.
In addition to changes in the directions of interest rates, the Bank's
long term performance is likely to be affected significantly by the shape and
magnitude of the slope of the yield curve. The yield curve is a graphical
representation of the relationship between short and long term interest rates.
As mentioned above, the majority of the
17
<PAGE>
Bank's liabilities are in the form of certificates of deposit, most of which
reprice or mature within one year. As such, the rates paid on these
liabilities are influenced primarily by rates at the short end of the yield
curve. The Bank's composition of assets, however, is heavily weighted in long
term fixed rate mortgages, which are generally affected more by the rates at
the long end of the yield curve. Therefore, all else being equal, the Bank
should generally be more profitable in the long run when there is a positive
slope in the yield curve. Historically, a positively sloped yield curve is
more common, with long-term rates higher than short-term rates. However, the
current shape of the yield curve is very flat, (and slightly inverted), a
scenario which continues to present challenges to the Bank. The Bank's
excellent asset quality, low efficiency ratio, and healthy capital to assets
ratio have allowed the Bank to continue to operate profitability, despite this
challenging yield curve environment.
As a result of the merger with the Bank of Bellingham, the combined
Bank's balance sheet has become less liability sensitive (compared to Horizon
Bank alone), as many of the Bank of Bellingham's assets are variable rate
products which generally re-price more rapidly than Horizon Financial's
previous asset base.
Quantitative Disclosures About Market Risk. The table below represents
the balances of the Bank's financial instruments at March 31, 2000. The
expected maturity categories take into consideration projected prepayment
rates as well as actual amortization of principal. In preparation of the
table, numerous assumptions were made regarding prepayment rates and deposit
account interest sensitivity.
<TABLE>
Average Within 1 Year to 2 Years 3 Years Beyond Fair
Yield 1 Year 2 Years to 3 Years to 5 Years 5 Years Total Total
------- ------ --------- ---------- ----------- ------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Loans receivable............ 7.92% $101,624 $ 87,757 $57,751 $ 92,737 $249,715 $589,584 $570,953
Mortgage-backed securities.. 6.36 8,121 6,994 5,878 9,874 30,357 61,224 58,924
Investments and other
interest-earning assets.... 7.44 9,076 1,682 2,818 2,100 5,343 21,019 24,282
Interest-Sensitive
Liabilities:
Checking accounts........... 1.27 11,410 11,409 11,409 22,819 -- 57,047 57,047
Money market/
ultimate accounts ......... 3.73 25,053 25,053 25,052 8,351 -- 83,509 83,509
Savings accounts............ 3.05 10,690 10,691 10,691 3,622 -- 35,694 35,694
Certificates of deposit..... 5.40 308,240 43,414 7,441 20,740 8,242 388,077 391,192
Other borrowings............ 5.64 37,853 -- -- 2,000 -- 39,853 39,463
Off-Balance Sheet Items:
Commitments to
extend credit.............. 8.27 3,654 -- -- -- -- 3,654 3,654
Unused lines of credit...... 9.83 25,840 -- -- -- -- 25,840 25,840
Credit card arrangements....12.69 3,051 -- -- -- -- 3,051 3,051
</TABLE>
18
<PAGE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities,
they may react in different degrees to changes in market interest rates. In
addition, in the event of changes in interest rates, expected rates of
prepayments on loans and withdrawals from savings accounts might deviate
significantly from those assumed in presenting the table. Therefore, the data
presented in the table should not be relied upon as necessarily indicative of
actual future results.
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 21, 2001. 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 19, 2000
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 7, 2000, UPON WRITTEN REQUEST TO RICHARD P. JACOBSON, SECRETARY,
HORIZON FINANCIAL CORP., 1500 CORNWALL AVENUE, BELLINGHAM, WASHINGTON 98225.
19
<PAGE>
HORIZON FINANCIAL CORP.
Independent Auditor's Report
and
Consolidated Financial Statements
March 31, 2000, 1999 and 1998
<PAGE>
Horizon Financial Corp.
Table of Contents
March 31, 2000, 1999 and 1998
-----------------------------------------------------------------------------
Page
Independent Auditor's Report........................................ 1
Consolidated Financial Statements
Statement of Financial Position.................................. 2
Statement of Income.............................................. 3
Statement of Stockholders' Equity and Comprehensive Income ...... 4
Statement of Cash Flows.......................................... 5
Notes to Financial Statements.................................... 6-28
<PAGE>
MOSS-ADAMS LLP
------------------------------------------------------------------------------
Certified Public Accountants
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, 2000 and 1999,
and the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended March 31, 2000, 1999 and 1998. 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. and Subsidiary as of March 31, 2000 and 1999, and the results
of their operations and cash flows for each of the years ended March 31, 2000,
1999 and 1998, in conformity with generally accepted accounting principles.
/s/Moss-Adams LLP
Bellingham, Washington
April 25, 2000
1
<PAGE>
Horizon Financial Corp.
Consolidated Statement of Financial Position
March 31, 2000 and 1999
------------------------------------------------------------------------------
ASSETS
2000 1999
------------ ------------
Cash and cash equivalents $ 16,043,055 $ 10,889,530
Interest-bearing deposits 3,960,522 15,572,363
Investment securities
Available-for-sale (amortized cost 2000:
$10,935,828; 1999: $22,119,315) 14,203,332 26,554,946
Held-to-maturity (estimated fair value
2000: $863,733; 1999: $1,435,674) 868,764 1,391,873
Mortgage-backed securities
Available-for-sale (amortized cost 2000:
$52,974,906; 1999: $44,548,212) 50,796,431 44,963,817
Held-to-maturity (estimated fair value
2000: $8,127,513; 1999: $11,208,987) 8,248,627 10,959,539
Federal Home Loan Bank Stock 5,254,200 4,861,700
Loans receivable 589,583,539 533,649,169
Accrued interest and dividends receivable 4,391,961 4,087,010
Bank premises and equipment, net 16,192,154 11,609,414
Goodwill, net 631,442 688,846
Income tax receivable 316,328 -
Real estate owned 323,468 -
Other assets 3,100,220 2,887,895
------------ ------------
TOTAL ASSETS $713,914,043 $668,116,102
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $564,327,085 $537,389,845
Accounts payable and other liabilities 9,982,464 6,034,947
Securities sold under agreements to repurchase 17,853,000 14,800,000
Other borrowed funds 22,000,000 7,918,151
Advances by borrowers for taxes and insurance 1,083,905 928,618
Income tax currently payable - 770,986
Net deferred income tax liabilities 1,365,123 2,572,474
Deferred compensation 1,367,475 1,260,100
------------ ------------
Total liabilities 617,979,052 571,675,121
------------ ------------
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; 8,642,571 and 8,491,523
issued and outstanding, respectively 8,642,571 8,491,523
Additional paid-in capital 57,372,024 56,459,066
Retained earnings 33,325,068 28,638,576
Unearned ESOP shares (432,621) (350,000)
Accumulated other comprehensive income 718,759 3,201,816
Treasury stock, 366,000 and 0- shares,
at cost (3,690,810) -
------------ ------------
Total stockholders' equity 95,934,991 96,440,981
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $713,914,043 $668,116,102
============ ============
See accompanying notes to these financial statements. 2
-----------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Consolidated Statement of Income
Years Ended March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
INTEREST INCOME
Interest on loans $43,881,883 $41,848,137 $39,364,962
Investment and mortgage-backed
securities
Taxable interest 5,385,655 6,043,022 6,162,728
Nontaxable interest income 87,058 164,566 168,643
Dividends 592,681 63,567 48,273
----------- ----------- -----------
Total interest income 49,947,277 48,119,292 45,744,606
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 24,611,084 24,546,781 23,942,701
Interest on other borrowings 1,645,808 720,349 48,032
----------- ----------- -----------
Total interest expense 26,256,892 25,267,130 23,990,733
----------- ----------- -----------
Net interest income 23,690,385 22,852,162 21,753,873
PROVISION FOR LOAN LOSSES 437,234 484,500 520,500
----------- ----------- -----------
Net interest income after
provision for loan losses 23,253,151 22,367,662 21,233,373
----------- ----------- -----------
NONINTEREST INCOME
Service fees 1,895,482 1,937,808 1,459,711
Other 867,715 1,266,814 738,023
Net gain (loss) on sales of loans (97,026) (359,130) (356,668)
Net gain on sale of investment
securities 185,018 329,332 426,539
----------- ----------- -----------
Total noninterest income 2,851,189 3,174,824 2,267,605
----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 6,761,018 5,609,141 5,098,544
Building occupancy 2,201,486 1,704,764 1,470,961
Other expenses 2,760,783 2,687,500 2,069,206
Data processing 914,417 834,513 824,030
Advertising 606,085 520,804 471,615
----------- ----------- -----------
Total noninterest expense 13,243,789 11,356,722 9,934,356
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAX 12,860,551 14,185,764 13,566,622
PROVISION FOR INCOME TAX
Current 4,110,567 5,182,562 3,908,207
Deferred 69,473 (339,000) 690,000
----------- ----------- -----------
Total provision for income tax 4,180,040 4,843,562 4,598,207
----------- ----------- -----------
NET INCOME $ 8,680,511 $ 9,342,202 $ 8,968,415
=========== =========== ===========
BASIC EARNINGS PER SHARE $ 1.02 $ 1.10 $ 1.07
======== ======== ========
DILUTED EARNINGS PER SHARE $ 1.01 $ 1.08 $ 1.05
======== ======== ========
See accompanying notes to these financial statements. 3
------------------------------------------------------------------------------
<PAGE>
<TABLE>
Horizon Financial Corp.
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Years Ended March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------- Additional Unearned Other
Number of Paid-In Retained ESOP Comprehensive
Shares At Par Capital Earnings Shares Income (Loss)
------ ------ ------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1997 7,370,536 $7,370,536 $41,833,959 $ 34,163,333 $(450,000) $ 616,227
Comprehensive income
Net income - - - 8,968,415 - -
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes of
$1,297,898 - - - - - 2,519,450
Total other comprehensive
income - - - - - -
Comprehensive income - - - - - -
Recognition of ESOP shares
released - - - - 50,000 -
Cash dividends on common stock
at $0.83 per share based on
shares outstanding prior to
the merger for each respective
quarter - - - (6,188,444) - -
Dividend reinvestment plan 26,720 26,720 413,136 - - -
Stock options exercised 51,750 51,750 308,834 - - -
15% stock dividend 997,952 997,952 13,035,748 (14,033,700) - -
Cash paid for fractional
shares in connection
with stock dividend - - - (8,934) - -
--------- ---------- ----------- ------------ --------- ---------
BALANCE, March 31, 1998 8,446,958 8,446,958 55,591,677 22,900,670 (400,000) 3,135,677
Comprehensive income
Net income - - - 9,342,202 - -
Other comprehensive income
Change in unrealized
gains on available-for-
sale securities, net
taxes of $34,072 - - - - - 66,139
Total other comprehensive
income - - - - - -
Comprehensive income - - - - - -
Reclassification of previously
allocated proceeds from common
stock to retained earnings by
regulatory agreement- BOB - - 300,000 (300,000) - -
Recognition of ESOP
shares released - - - - 50,000 -
Cash dividends on common
stock at $0.44 per share
based on shares outstand-
ing prior to the merger
for each respective
quarter - - - (3,304,296) - -
Dividend reinvestment plan 35,801 35,801 496,461 - - -
Stock options exercised 8,764 8,764 70,928 - - -
--------- ---------- ----------- ------------ --------- ---------
BALANCE, March 31, 1999 8,491,523 8,491,523 56,459,066 28,638,576 (350,000) 3,201,816
Comprehensive income
Net income - - - 8,680,511 - -
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes of
$(1,279,151) - - - - - (2,483,057)
Total other comprehensive
income - - - - - -
Comprehensive income - - - - - -
Unearned ESOP shares - - - - (154,725) -
Recognition of ESOP shares
released - - - - 72,104 -
Cash dividends on common
stock at $.47 per share - - - (3,994,019) - -
Dividend reinvestment plan 31,427 31,427 341,654 - - -
Stock options exercised 119,621 119,621 571,304 - - -
Treasury stock purchased - - - - - -
--------- ---------- ----------- ------------ --------- ---------
BALANCE, March 31, 2000 8,642,571 $8,642,571 $57,372,024 $ 33,325,068 $(432,621) $ 718,759
========= ========== =========== ============ ========= =========
</TABLE>
<TABLE>
Treasury Total
Stock Stockholders' Comprehensive
at Cost Equity Increase
-------- ------ --------
<S> <C> <C> <C>
BALANCE, March 31, 1997 $ - $83,534,055
Comprehensive income
Net income - 8,968,415 $ 8,968,415
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes of
$1,297,898 - 2,519,450 2,519,450
------------
Total other comprehensive
income - - 2,519,450
------------
Comprehensive income - - $ 11,487,865
============
Recognition of ESOP shares
released - 50,000
Cash dividends on common stock
at $0.83 per share based on
shares outstanding prior to
the merger for each respective
quarter - (6,188,444)
Dividend reinvestment plan - 439,856
Stock options exercised - 360,584
15% stock dividend - -
Cash paid for fractional
shares in connection
with stock dividend - (8,934)
------------ -------------
BALANCE, March 31, 1998 - 89,674,982
Comprehensive income
Net income - 9,342,202 $ 9,342,202
Other comprehensive income
Change in unrealized
gains on available-for-
sale securities, net
taxes of $34,072 - 66,139 66,139
------------
Total other comprehensive
income - - 66,139
------------
Comprehensive income - - $ 9,408,341
============
Reclassification of previously
allocated proceeds from common
stock to retained earnings by
regulatory agreement- BOB - -
Recognition of ESOP
shares released - 50,000
Cash dividends on common
stock at $0.44 per share
based on shares outstand-
ing prior to the merger
for each respective
quarter - (3,304,296)
Dividend reinvestment plan - 532,262
Stock options exercised - 79,692
------------ -------------
BALANCE, March 31, 1999 - 96,440,981
Comprehensive income
Net income - 8,680,511 $ 8,680,511
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net taxes of
$(1,279,151) - (2,483,057) (2,483,057)
------------
Total other comprehensive
income - - (2,483,057)
------------
Comprehensive income - - $ 6,197,454
============
Unearned ESOP shares - (154,725)
Recognition of ESOP shares
released - 72,104
Cash dividends on common
stock at $.47 per share - (3,994,019)
Dividend reinvestment plan - 373,081
Stock options exercised - 690,925
Treasury stock purchased (3,690,810) (3,690,810)
------------ -------------
BALANCE, March 31, 2000 $ (3,690,810) $ 95,934,991
============ =============
See accompanying notes to these financial statements. 4
-----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Horizon Financial Corp.
Consolidated Statement of Cash Flows
Years Ended March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 8,680,511 $ 9,342,202 $ 8,968,415
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation 1,072,641 555,740 449,141
Amortization and deferrals, net 193,897 260,919 51,387
Stock dividends-Federal Home
Loan Bank stock (392,500) (19,700) (20,200)
Provision for loan losses 437,234 484,500 520,500
Provision for deferred income tax 69,473 (339,000) 690,000
Changes in assets and liabilities
Interest and dividends receivable (304,951) (60,856) (133,234)
Interest payable 122,875 53,873 (98,714)
Federal income tax (receivable)
payable (1,087,314) 646,093 428,737
Goodwill 57,404 76,538 95,484
Other assets (212,325) (492,782) (449,022)
Other liabilities 3,918,879 (1,943,568) (918,253)
------------ ------------ -----------
Net cash flows from
operating activities 12,555,824 8,563,959 9,584,241
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing
deposits, net 11,611,841 (3,957,773) (1,177,863)
Purchases of investment
securities--available-for-
sale (9,241,180) (4,902,969) (19,278,206)
Proceeds from sales and
maturities of investment
securities--available-for-
sale 20,425,493 16,585,332 14,451,598
Proceeds from maturities of
investment securities--held-
to-maturity 523,109 991,752 6,395,834
Purchases of mortgage-backed
securities--available-for-
sale (6,016,586) - -
Proceeds from maturities of
mortgage-backed securities--
available-for-sale 8,116,641 25,622,744 4,202,075
Purchases of mortgage-backed
securities--held-to-maturity - - 22,544,856
Proceeds from maturities of
mortgage-backed securities--
held-to-maturity 2,710,912 4,528,984 (6,510,126)
Purchase of Federal Home Loan
Bank stock - (4,660,400) -
Net change in loans (67,173,371) (91,891,262) (52,530,814)
Purchases of bank premises
and equipment (5,655,381) (4,571,408) (348,214)
Purchase of other real estate
owned (323,468) - -
------------ ------------ -----------
Net cash flows from
investing activities (45,021,990) (62,255,000) (32,250,860)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 26,937,240 36,096,830 29,031,876
Proceeds from securities sold
under agreements to repurchase 3,053,000 14,800,000 -
Proceeds from other borrowed
funds 14,081,849 6,738,504 579,647
Common stock issued, net 1,064,006 611,954 950,440
Cash dividends paid (3,825,594) (3,304,296) (6,197,378)
Treasury stock purchased (3,690,810) (203,838) -
------------ ------------ -----------
Net cash flows from
financing activities 37,619,691 54,739,154 24,364,585
------------ ------------ -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 5,153,525 1,048,113 1,697,966
CASH AND CASH EQUIVALENTS,
beginning of year 10,889,530 9,841,417 8,143,451
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end
of year $ 16,043,055 $ 10,889,530 $ 9,841,417
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for
interest $ 26,206,046 $ 25,229,166 $24,064,509
============ ============ ===========
Cash paid during the year for
income tax $ 4,610,000 $ 4,597,200 $ 3,579,000
============ ============ ===========
NONCASH INVESTING AND FINANCING
TRANSACTIONS
Mortgage loans securitized and
exchanged for FHLMC partici-
pation certificates $ 15,851,825 $ 36,830,693 $12,622,660
============ ============ ===========
See accompanying notes to these financial statements. 5
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Principles of Consolidation - As of March 31, 2000, 1999 and 1998, 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.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and noninterest-bearing amounts due from
banks.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
Investments in Interest-Bearing Deposits - Investments in interest-bearing
deposits consist principally of federal funds sold to a major Seattle-area
bank and short-term certificates of deposit with Western Washington financial
institutions.
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 other
comprehensive income within the statement 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.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are other than temporary are recognized
by write-downs of the individual securities to their fair value. Such
write-downs would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. The Company had no trading securities at
March 31, 2000 and 1999.
Federal Home Loan Bank Stock - The Bank's investment in Federal Home Loan Bank
(the FHLB) stock is a restricted investment carried at par value ($100 per
share), which reasonably approximates its fair value. As a member of the FHLB
system, the Bank is required to maintain a minimum level of investment in FHLB
stock based on specific percentages of its outstanding FHLB advances. The Bank
may request redemption at par value of any stock in excess of the amount the
Bank is required to hold. Stock redemptions are at the discretion of the FHLB.
6
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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.
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.
Mortgage Servicing Rights - The Company allocates its total cost in mortgage
loans between mortgage servicing rights and loans, based upon their relative
fair values, when loans are subsequently sold or securitized, with the
servicing rights retained. Fair values are generally obtained through quoted
market prices. 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.
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.
A material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.
The majority of the Company's loan portfolio consists of commercial loans and
single-family residential loans secured by real estate in the Whatcom, Skagit
and Snohomish County areas. Real estate prices in this market are stable at
this time. However, the ultimate collectibility of a substantial portion of
the Company's loan portfolio may be susceptible to changes in local market
conditions in the future.
7
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.
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 three to ten years for equipment.
Goodwill - Goodwill recognized in connection with the purchase of branch
assets and related liabilities is amortized using the straight-line method
over ten years. Amortization expense was $57,404, $76,538, and $95,484 at
March 31, 2000, 1999, and 1998, respectively.
Other Real Estate Owned - Other real estate owned includes properties acquired
through foreclosure. These properties are recorded at the lower of cost or
estimated fair value. Losses arising from the acquisition of property, in full
or partial satisfaction of loans, are charged to the allowance for loan
losses.
Subsequent to the transfer to other real estate owned, these assets continue
to be recorded at the lower of cost or fair value (less estimated cost to
sell), based on periodic evaluations. Generally, legal and professional fees
associated with foreclosures are expensed as incurred. Costs incurred to
improve property prior to sale are capitalized, however, in no event are
recorded costs allowed to exceed fair value. Subsequent gains, losses, or
expenses recognized on the sale of these properties are included in
noninterest income or expense.
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.
Earnings Per Share - Basic earnings per share amounts are computed based on
the weighted average number of shares outstanding during the period after
giving retroactive effect to stock dividends and stock splits. Diluted
earnings per share amounts are computed by determining the number of
additional shares that are deemed outstanding due to stock options under the
treasury stock method.
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.
Advertising Costs - The Company expenses advertising costs as they are
incurred.
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 15.
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>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137 entitled Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date
of SFAS Statement No. 133. The statement amends SFAS No. 133 to defer its
effective date to all fiscal quarters of all fiscal years beginning after June
15, 2000. Management does not believe the adoption of this statement will have
a material effect on its financial condition or results of operation.
NOTE 2 - MERGER CONSUMMATED DURING 2000
In June 1999, Bellingham Bancorporation and Subsidiary (BOB) was merged into
the Corporation. In connection with this transaction, the Corporation issued
1,129,264 shares of common stock, including 146,078 options and warrants, to
the shareowners of BOB in an exchange that gave BOB shareowners 2.74 shares of
the Corporation's stock for one share of BOB stock. The merger has been
accounted for as a pooling-of-interests pursuant to generally accepted
accounting principles. Accordingly, the Corporation's consolidated financial
statements have been restated for all periods prior to the acquisition to
include the financial position, results of operations, and cash flow of BOB.
At the date of acquisition, BOB had total assets of $64.3 million, revenue of
$1.3 million, and net income of $.57 million. The effects of the restatement
on revenues, net income and shareowner's equity are shown below:
1999 1998
------------ -------------
Revenues
The Corporation (as previously reported) $ 45,167,781 $ 42,592,187
BOB 6,126,335 5,420,024
------------ -------------
As Restated $ 51,294,116 $ 48,012,211
============ =============
Net Income
The Corporation (as previously reported) $ 8,633,001 $ 8,221,877
BOB 709,201 746,538
------------ -------------
As Restated $ 9,342,202 $ 8,968,415
============ =============
Stockholders' equity
The Corporation (as previously reported) $ 89,750,029 $ 83,894,797
BOB 6,690,952 5,780,185
------------ -------------
As Restated $ 96,440,981 $ 89,674,982
============ =============
NOTE 3 - INTEREST-BEARING DEPOSITS
Interest bearing deposits consisted of the following March 31, 2000 and 1999:
2000 1999
----------- -----------
Federal funds sold $ 3,727,000 $ 9,786,933
Certificates of deposit 233,522 5,785,340
----------- -----------
$ 3,960,522 $15,572,363
=========== ===========
The Company has funds on deposit with the Federal Home Loan Bank in a Daily
Interest Deposit (DID) account. This account acts like a savings account and
earns interest based on the daily federal funds rate.
9
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 4 - 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 March 31, 2000 and 1999,
respectively:
<TABLE>
2000
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Available-For-Sale Securities
State and political subdivisions and U.S.
government agency securities $ 4,811,736 $ 3,425 $ (39,754) $ 4,775,406
Marketable equity securities 1,836,869 3,366,682 (37,188) 5,166,364
Corporate debt securities 4,287,223 - (25,661) 4,261,562
------------ ----------- ------------ ------------
Total available-for-sale securities 10,935,828 3,370,107 (102,603) 14,203,332
------------ ----------- ------------ ------------
Held-To-Maturity Securities
State and political subdivisions and U.S.
government agency securities 368,837 - (18,385) 350,452
Corporate debt securities 499,927 13,354 - 513,281
------------ ----------- ------------ ------------
Total held-to-maturity securities 868,764 13,354 (18,385) 863,733
------------ ----------- ------------ ------------
Total investment securities $ 11,804,592 $ 3,383,461 $ (120,988) $ 15,067,065
============ =========== ============ ============
</TABLE>
<TABLE>
1999
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Available-For-Sale Securities
State and political subdivisions and U.S.
government agency securities $ 12,312,352 $ 72,226 $ (316) $ 12,384,262
Marketable equity securities 337,851 4,390,661 (23,438) 4,705,074
Corporate debt securities 9,469,112 15,140 (18,642) 9,465,610
------------ ----------- ------------ ------------
Total available-for-sale securities 22,119,315 4,478,027 (42,396) 26,554,946
------------ ----------- ------------ ------------
Held-To-Maturity Securities
State and political subdivisions and U.S.
government agency securities 892,063 3,928 (785) 895,206
Corporate debt securities 499,810 40,658 - 540,468
------------ ----------- ------------ ------------
Total held-to-maturity securities 1,391,873 44,586 (785) 1,435,674
------------ ----------- ------------ ------------
Total investment securities $ 23,511,188 $ 4,522,613 $ (43,181) $ 27,990,620
============ =========== ============ ============
</TABLE>
The amortized cost and estimated fair value of investment securities at March
31, 2000, 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.
10
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES (Continued)
2000
--------------------------------------------------
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 $ 2,154,831 $ 2,153,080 $ - $ -
Two to five years 2,180,838 2,150,608 - -
Five to ten years 476,067 471,718 368,837 350,452
----------- ----------- ---------- -----------
4,811,736 4,775,406 368,837 350,452
----------- ----------- ---------- -----------
Corporate debt securities
One year 1,900,000 1,897,187 499,927 513,281
Two to five years 2,387,223 2,364,375 - -
Five to ten years - - - -
----------- ----------- ---------- -----------
4,287,223 4,261,562 499,927 513,281
----------- ----------- ---------- -----------
Marketable equity
securities (liquid) 1,836,869 5,166,364 - -
----------- ----------- ---------- -----------
Total investment
securities $10,935,828 $14,203,332 $ 868,764 $ 863,733
=========== =========== ========== ===========
Proceeds from sales of investments and gross realized gains and losses on
investment sales were as follows for the year ended March 31:
2000 1999 1998
--------- ------------ ------------
Proceeds from sales of investments $ 186,000 $ 16,513,779 $ 22,332,061
========= ============ ============
Gross gains realized on sales
of investments $ 185,018 $ 398,492 $ 426,539
========= ============ ============
Gross losses realized on sales
of investments $ - $ 69,160 $ -
========= ============ ============
Information about concentrations of investments in particular industries for
marketable equity securities and corporate debt securities at March 31 consist
of the following:
2000 1999
-----------------------------------------------
Market Market
Cost Value Cost Value
---------- ---------- ---------- ----------
Marketable equity securities
Banking $ 318,380 $ 907,239 $ 318,380 $ 968,387
Government agency stocks 1,518,489 4,259,125 19,471 3,736,687
---------- ---------- ---------- ----------
$1,836,869 $5,166,364 $ 337,851 $4,705,074
========== ========== ========== ==========
Corporate debt securities
Finance companies $3,387,223 $3,364,375 $8,569,112 $8,561,673
Private utilities 900,000 897,187 900,000 903,937
---------- ---------- ---------- ----------
$4,287,223 $4,261,562 $9,469,112 $9,465,610
========== ========== ========== ==========
At March 31, 2000 and 1999, U.S. government agency and corporate debt
securities of $1,370,000 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.
11
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 5 - MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at March 31 consist of the following:
2000
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- ----------- -----------
Available-for-sale
securities $52,974,906 $ 18,768 $(2,197,243) $50,796,431
Held-to-maturity
securities 8,248,627 96,529 (217,643) 8,127,513
----------- -------- ----------- -----------
Total mortgage-
backed securities $61,223,533 $115,297 $(2,414,886) $58,923,944
=========== ======== =========== ===========
1999
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- ----------- -----------
Available-for-sale
securities $44,548,212 $565,079 $ (149,474) $ 963,817
Held-to-maturity
securities 10,959,539 259,122 (9,674) 11,208,987
----------- -------- ----------- -----------
Total mortgage-
backed securities $55,507,751 $824,201 $ (159,148) $56,172,804
=========== ======== =========== ===========
The amortized cost and estimated fair value of mortgage-backed securities at
March 31, 2000 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.
2000
--------------------------------------------------
Available-For-Sale Held-To-Maturity
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ---------- -----------
Mortgage-backed
securities
One year $ 1,215,322 $ 1,201,003 $ 175,068 $ 173,334
Two to five years 1,659,365 1,597,802 476,059 478,973
Six to ten years 1,467,023 1,405,436 6,961,029 6,768,168
After ten years 48,633,196 46,592,190 636,471 707,038
----------- ----------- ---------- -----------
Total mortgage-
backed securities $52,974,906 $50,796,431 $8,248,627 $ 8,127,513
=========== =========== ========== ===========
All of the above mortgage-backed securities are rated AAA by a nationally
recognized statistical rating organization.
12
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 6 - 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:
2000 1999
-------------- --------------
First mortgage loans
1-4 Family $ 606,702,881 $ 564,394,944
1-4 Family construction 25,911,941 23,817,577
Less participating interests sold (176,537,497) (163,526,986)
-------------- --------------
Net of first mortgage loans 456,077,325 424,685,535
Construction and land development 18,716,744 2,505,484
Residential commercial real estate 21,999,357 18,158,927
Non-residential commercial real estate 88,322,611 74,120,509
Commercial loans 14,472,300 19,293,804
Home equity secured 16,952,862 13,499,198
Other consumer loans 4,829,230 5,216,800
-------------- --------------
621,370,429 557,480,257
Less:
Undisbursed loan proceeds (19,631,956) (12,163,897)
Deferred loan fees (7,397,782) (7,203,886)
Allowance for loan losses (4,757,152) (4,463,305)
-------------- --------------
$ 589,583,539 $ 533,649,169
============== ==============
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, 2000, 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 $ 22,069,327 Less than one year $ 18,851,159
One to two years 31,756,253 One to two years -
Two to five years 39,434,279 Two to five years 217,294
Five to ten years 96,658,050 Five to ten years 549,047
Over ten years 399,866,399 Over ten years 11,968,622
Real estate loans serviced for others are $176,537,497 and $163,526,986,
respectively, as of March 31, 2000 and 1999.
The bank generally receives a monthly fee of 0.25% to 0.375% per annum of the
unpaid balance of each loan. The sold loans are sold without right of recourse
to the Bank by the buyer of the loan interests in the event of default by the
borrower.
Impaired loans on a nonaccrual basis and the related interest are not material
as of March 31, 2000 and 1999.
13
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 6 - LOANS RECEIVABLE (Continued)
The allowance for loan losses at March 31 and changes during the year are as
follows:
2000 1999 1998
------------ ------------ ------------
Balance, beginning of year $ 4,463,305 $ 4,085,203 $ 3,779,761
Provision for loan losses 437,234 484,500 520,500
Adjustment to reserves (143,387) (106,398) (215,058)
------------ ------------ ------------
Balance, end of year $ 4,757,152 $ 4,463,305 $ 4,085,203
============ ============ ============
NOTE 7 - MORTGAGE SERVICING RIGHTS
Loan costs allocated to mortgage servicing rights were as follows as of March
31, 2000 and 1999:
2000 1999
------------ ------------
Beginning balance $ 1,335,263 $ 697,206
Additions for new loans 287,955 779,592
Amortization (156,551) (141,535)
------------ ------------
Ending balance 1,466,667 1,335,263
Valuation allowance for impairment
mortgage servicing rights (770,502) (703,074)
------------ ------------
Mortgage servicing rights, net $ 696,165 $ 632,189
============ ============
Changes in the valuation allowance for impairment of mortgage servicing was as
follows:
Beginning balance $ (703,073) $ (370,035)
Additions (150,629) (409,921)
Credited to income 83,200 76,882
------------ ------------
Ending balance $ (770,502) $ (703,074)
============ ============
Note 8 - Accrued Interest And Dividends Receivable
Accrued interest and dividends receivable at March 31 is summarized as
follows:
2000 1999
------------ ------------
Investment securities $ 247,395 $ 546,268
Mortgage-backed securities 400,634 285,052
Loans receivable 3,638,763 3,246,245
Dividends on marketable equity securities 105,169 9,445
------------ ------------
$ 4,391,961 $ 4,087,010
============ ============
14
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 9 - PREMISES AND EQUIPMENT
Premises and equipment at March 31 consisted of:
2000 1999
------------ ------------
Buildings $ 11,059,735 $ 8,076,482
Equipment 7,280,920 6,183,824
------------ ------------
18,340,655 14,260,306
Accumulated depreciation (6,771,030) (5,934,695)
------------ ------------
11,569,625 8,325,611
Land 4,622,529 3,283,803
------------ ------------
$ 16,192,154 $ 11,609,414
============ ============
NOTE 10 - DEPOSITS
A comparative summary of deposits at March 31 follows (the contractual or
weighted average interest rates are indicated in parentheses):
2000 1999
------------ ------------
Demand deposits
Savings $ 35,693,618 $ 37,659,911
Checking 37,910,618 36,315,440
Checking (noninterest-bearing) 19,136,845 18,257,468
Money market 30,804,219 36,224,770
Ultimate Money Market 52,704,628 48,848,798
------------ ------------
176,249,928 177,306,387
------------ ------------
Time certificates of deposit
Less than $100,000 286,588,897 268,499,957
Greater than or equal to $100,000 101,488,260 91,583,501
------------ ------------
388,077,157 360,083,458
------------ ------------
Total deposits $564,327,085 $537,389,845
============ ============
Time certificate of deposit maturities at March 31 are as follows:
2000
-----------------------------------------
Variable Fixed
Rate Rate Total 1999
----------- ------------- ------------- -------------
Within one year $ 3,103,477 $ 282,304,409 $ 285,407,886 $ 247,075,430
One to two years 2,476,450 44,438,218 46,914,668 52,509,382
Two to three years 1,091,828 6,983,798 8,075,626 10,101,408
Three to four years 7,136,288 8,442,851 15,579,139 5,784,299
Four to five years 4,209,376 14,754,562 18,963,938 17,311,928
Over five years 2,910,237 10,225,663 13,135,900 27,301,011
----------- ------------- ------------- -------------
$20,927,656 $ 367,149,501 $ 388,077,157 $ 360,083,458
=========== ============= ============= =============
15
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 10 - DEPOSITS (Continued)
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, 2000
and 1999 is 4.65 percent and 4.95 percent, respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
2000 1999 1998
----------- ----------- -----------
Money market $ 3,219,405 $ 2,936,536 $ 2,843,813
Checking 535,665 578,427 560,917
Savings 1,083,539 1,126,735 1,188,339
Certificates of deposit 19,772,474 19,905,083 19,349,632
----------- ----------- -----------
$24,611,083 $24,546,781 $23,942,701
=========== =========== ===========
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank has sold certain securities of the U.S. Government and its agencies
and other approved investments under agreements to repurchase. A safekeeping
agent not under control of the Bank held the securities underlying the
agreements. Securities sold under agreements to repurchase were $17,853,000
and $14,800,000 as of March 31, 2000 and 1999, with interest rates ranging
from 5.30% to 6.36% and 4.89% to 5.30% as of March 31, 2000 and 1999,
respectively. The Company has collateralized these agreements with
mortgage-backed securities totaling approximately $16 million. Maturities for
the repurchase agreements are $6,853,000 in May 2000, and $11,000,000 in
September 2000.
NOTE 12 - OTHER BORROWED FUNDS
The Bank is a member of the Federal Home Loan Bank (FHLB) of Seattle. As a
member, the Bank has a committed line of credit up to 20% of total assets,
subject to the Bank pledging sufficient collateral and maintaining the
required stock investment. At March 31, 2000, committed lines of credit
agreements totaling approximately $104.9 million were available to the Bank,
of which, $22 million was outstanding at year end. These advances bear
interest ranging from 5.94% to 6.75% per annum. Maturities for the advances
are $5,000,000 in April 2000, $5,000,000 in May 2000, $5,000,000 in June 2000,
$5,000,000 in March 2001, and $2,000,000 in May 3002.
The Bank has a treasury, tax, and loan note option with the Federal Reserve
Bank in the amount of $90,262 at March 31, 2000 payable on demand. Interest is
payable monthly at a rate .25% below the federal funds rate (5.75%). The note
is secured by a pledge of certain qualifying investment securities.
NOTE 13 - 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:
2000 1999 1998
----------- ----------- -----------
Deferred loan fees $ (516,830) $ (117,893) $ (766,610)
Loan loss and general reserves 647,736 488,792 85,224
Deferred compensation 36,776 (5,066) (5,100)
Other, net (237,155) (26,833) (3,514)
----------- ----------- -----------
$ (69,473) $ 339,000 $ (690,000)
=========== =========== ===========
16
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 13 - INCOME TAX (Continued)
The nature and components of the Company's net deferred tax assets
(liabilities), established at an estimated tax rate of 34.25% for 2000 and 34%
for 1999, are as follows at March 31:
2000 1999
------------ ------------
Deferred Tax Assets
Deferred compensation agreements $ 468,000 $ 428,000
Financial reporting accrued expenses
not recognized for tax purposes 294,000 276,000
------------ ------------
Total deferred assets 762,000 704,000
------------ ------------
Deferred Tax Liabilities
Deferred loan fees for tax purposes in
excess of amounts deferred for
financial reporting purposes (1,126,000) (605,000)
Tax based loan loss deductions not
recognized for financial reporting (172,000) (798,000)
Tax effect of unrealized gains on
available-for-sale securities (370,270) (1,647,094)
Other deferred tax liabilities (458,853) (226,380)
------------ ------------
Total deferred liabilities (2,127,123) (3,276,474)
------------ ------------
Net deferred tax assets
(liabilities) $ (1,365,123) $ (2,572,474)
============ ============
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:
2000 1999 1998
----------- ------------ ------------
Provision for income tax at the
statutory rate of 35 percent $ 4,501,193 $ 4,965,017 $ 4,748,318
Increase (decrease) in tax
resulting from
Income taxed at lower bracket (100,000) (100,000) (100,000)
Dividends received deduction (21,848) (15,129) (18,638)
Other, net (199,305) (6,326) (31,473)
----------- ------------ ------------
Income tax provision $ 4,180,040 $ 4,843,562 $ 4,598,207
=========== ============ ============
Prior to 1997, 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, 2000 and 1999 was approximately $4,269,000
and $5,337,000, respectively. If any portion of this amount is subsequently
used for purposes other than to absorb loan losses, that portion will be
subject to federal income tax at the then prevailing tax rate.
17
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 14 - BENEFIT PLANS
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.
During fiscal year 1999, the Company began steps necessary to terminate the
plan, including seeking approval for termination from the Internal Revenue
Service. The Company completed the steps necessary to terminate the plan in
the fiscal year 2000, at which time all assets of the plan were distributed to
participants either through the purchase of a retirement annuity or rolled
into the participant's 401(k) account.
The plan's funded status as of March 31, 2000, 1999 and 1998 was as follows:
March 31,
-------------------------------------------
2000 1999 1998
------------ ----------- -------------
Change in benefit obligation
Benefit obligation at
beginning of year $ 3,039,732 $ 3,327,085 $ 3,081,040
Service cost - 128,064 124,996
Interest cost 156,889 197,091 182,027
Amendments 910,017 - -
Plan curtailment - (823,569) -
Actuarial (gain) loss (529,668) 311,008 42,802
Benefits paid (3,576,970) (99,947) (103,780)
------------ ----------- -------------
Benefit obligation at end
of year - 3,039,732 3,327,085
------------ ----------- -------------
Change in plan assets
Fair value of plan assets at
beginning of year 3,156,526 2,667,341 2,340,028
Actual return on plan assets 306,769 380,811 214,496
Plan contributions 206,259 208,321 216,597
Operating expenses paid from
Trust (92,584) - -
Benefits paid (3,576,970) (99,947) (103,780)
------------ ----------- -------------
Fair value of plan assets
at end of year - 3,156,526 2,667,341
------------ ----------- -------------
Funded status - 116,794 (659,744)
Unrecognized net actuarial loss - - 446,484
Unrecognized transition
obligation - - (70,882)
Unrecognized prior service
cost - - (103,436)
------------ ----------- -------------
Prepaid (accrued) benefit
cost $ - $ 116,794 $ (387,578)
============ =========== =============
March 31,
-------------------------------------------
2000 1999 1998
------------ ----------- -------------
Components of net periodic
benefit cost
Service cost $ - $ 128,064 $ 124,996
Interest cost 156,889 197,091 182,027
Expected return on plan assets (189,919) (160,753) (141,356)
Recognized net (gain)/loss - 11,229 17,174
Amortization of prior service cost - (13,365) (13,365)
Amortization of transition
obligation - (18,491) (18,491)
Recognizition of prior service
costs 910,017 (90,071) -
Recognized (gain)/loss of
curtailment - (349,755) -
Special pension expense for
settlement -- SFAS 88 (553,934) - -
----------- ----------- --------------
Net periodic benefit cost
(benefit) $ 323,053 $ (296,051) $ 150,985
=========== =========== ==============
18
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 14 - BENEFIT PLANS (Continued)
The weighted average assumptions used were as follows:
2000 1999 1998
--------- ---------- ----------
Discount rate 5.25% 5.25% 6.00%
Rate of increase in compensation
levels - % 5.00% 5.00%
Expected long-term rate of return
on plan assets 6.00% 6.00% 6.00%
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, 2000 and 1999, the cash
surrender values of these policies included in other assets aggregated
$1,934,789 and $1,796,484, respectively.
Deferred compensation expense amounted to $150,000, $72,000 and $71,900 in
2000, 1999 and 1998, respectively.
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
$421,930, $351,144 and $338,536 for 2000, 1999 and 1998, respectively.
Employee Stock Ownership Plan - The Company has a noncontributory employee
stock ownership plan (ESOP) for those employees who have completed a minimum
of two years of service. The Company's contribution is determined annually by
the Board of Directors. 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.
In April 1996, the Company issued a new loan to the ESOP in the amount of
$500,000, to purchase 40,000 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. The ESOP shares initially were pledged as
collateral for its debt. As the obligation is reduced, shares are released
from collateral and allocated to the participants' accounts at a rate of 10% a
year. In May 1997, the Company issued a 15% stock dividend which added an
additional 5,400 shares to the unallocated ESOP shares. In May 1999, the
Company issued an additional loan to the ESOP in the amount of $154,725, to
purchase 12,500 shares of common stock in the open market. The loan is to be
repaid over seven years with annual payments including interest due March 31.
Shares released for allocation were 6,386, 4,600, and 4,600 for the years
ended March 31, 2000, 1999, and 1998, respectively. The ESOP shares relating
to the loans outstanding as of March 31 were as follows:
2000 1999 1998
--------- --------- ---------
Number of shares
Allocated shares 19,586 13,200 8,600
Unallocated shares 38,314 32,200 36,800
--------- --------- ---------
Total ESOP shares 57,900 45,400 45,400
========= ========= =========
Fair value
Unallocated shares $ 344,826 $ 426,650 $ 687,700
========= ========= =========
Dividends paid on unallocated shares of stock are reinvested and the new
shares purchased are allocated to the participants. Compensation expense for
the ESOP plan is based upon the fair value of shares committed to be released
each year.
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 three 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 $300,904, $174,463 and $125,609 for the years ended March
31, 2000, 1999 and 1998, respectively.
19
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 14 - BENEFIT PLANS (Continued)
The Bellingham Bancorporation had a 401(k) savings plan covering substantially
all of its full-time employees. Eligible employees contributed through payroll
deductions. Effective January 1996, the plan was amended to allow the Bank to
make annual matching contributions, based on actual employee contributions and
certain formulas established in the plan, up to a maximum of 4% of the
employee's salary. At the time of the merger, employees were transferred into
the Company's plan.
NOTE 15 - STOCKHOLDERS' EQUITY
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 in thousands) 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, 2000, that each entity meets all capital
adequacy requirements to which they are subject.
As of August 15, 1999, 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.
<TABLE>
In Thousands
------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000
Total Capital
(to Risk Weighted Assets)
Consolidated $ 99,530 22.73% $ 35,025 > 8.00% $ 43,781 > 10.00%
- -
Horizon Bank $ 99,372 22.93% $ 34,666 > 8.00% $ 43,333 > 10.00%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 94,514 21.59% $ 17,512 > 4.00% $ 26,269 > 6.00%
- -
Horizon Bank $ 94,356 21.77% $ 17,333 > 4.00% $ 26,000 > 6.00%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 94,514 13.60% $ 27,792 > 4.00% $ 34,740 > 5.00%
- -
Horizon Bank $ 94,356 13.58% $ 27,792 > 4.00% $ 34,740 > 5.00%
- -
As of March 31, 1999
Total Capital
(to Risk Weighted Assets)
Consolidated $ 98,044 25.35% $ 30,936 > 8.00% $ 38,670 > 10.00%
- -
Horizon Bank $ 95,910 24.19% $ 31,717 > 8.00% $ 39,646 > 10.00%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 92,466 23.91% $ 15,468 > 4.00% $ 23,202 > 6.00%
- -
Horizon Bank $ 92,512 23.33% $ 15,858 > 4.00% $ 23,788 > 6.00%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 92,466 14.11% $ 26,217 > 4.00% $ 32,772 > 5.00%
- -
Horizon Bank $ 92,512 14.11% $ 26,220 > 4.00% $ 32,775 > 5.00%
- -
</TABLE>
20
-------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 15 - STOCKHOLDERS' EQUITY (Continued)
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.
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.
Stock Repurchase Plans - During fiscal year 1998, the Company announced a plan
to repurchase up to 747,000 shares or approximately 10% of the Company's
outstanding common stock. During fiscal 1999, 13,900 shares were repurchased
under this plan at a cost of $203,838. In January 1999, the Company entered
into a definitive merger agreement with Bellingham Bancorporation, and in
connection with this agreement the Company subsequently canceled the
repurchase plan. Pursuant to an earlier plan, the Company repurchased 249,090
shares for a total amount of $2,898,631. In January 2000, the Company
announced a plan to repurchase up to 863,000 shares or approximately 10% of
the Company's outstanding common stock. During the 4th quarter of fiscal 2000,
366,000 shares were repurchased under this plan at a cost of $3,690,810.
Stock Warrants - In 1992, certain key organizers of the Bank of Bellingham
received warrants for 24,000 shares of stock at an exercise price of $12.50
per share. In conjunction with the merger of Bellingham Bancorporation, the
outstanding warrants as of June 19, 1999 were converted at 2.74 shares of
Horizon for each share of Bellingham Bancorporation amounting to 32,880
shares at an exercise price of $4.56 per share. As of March 31, 2000, warrants
for 27,400 shares of stock were still outstanding, which expire September 30,
2002.
Stock Option and Incentive Plans - The Company may award options for a maximum
of 414,000 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 ten years.
Pursuant to the merger with Bellingham Bancorporation in June 1999, the
Company adopted the outstanding options in the 1995 Bellingham Bancorporation
Stock Option and Incentive Plan. The plan consisted of 32,200 Bellingham
Bancorporation shares x 2.74 = 88,228 shares. Options under this plan were
granted at fair market value, vest at 20% per year, are exercisable from one
to five years and expire after ten years. There are no additional options to
be granted under this plan.
Stock options outstanding also include shares issued under the 1986 Stock
Option and Incentive Plan. Options under this plan were granted at fair market
value, vest at 20 to 35 percent per year, are exercisable from one to five
years and expire after ten years. There are no additional options to be
granted under this plan.
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 1998 and 1999 is estimated at $180,439 and $660,597. The
fair value of options issued in 2000 is estimated at $42,292. The following
assumptions were used to estimate the fair value of the options:
2000 1999 1998
---- ---- ----
Risk-free interest rate 6.43 % 5.18 % 5.66 %
Dividend yield rate 4.116% 2.827% 5.117%
Price volatility .3068 0.2482 .2542
Weighted average expected life of options 3.10 yr. 3.65 yr. 3.78 yr.
21
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 15 - STOCKHOLDERS' EQUITY (Continued)
Management believes that the assumptions used in the option pricing model are
highly subjective and represent only tne estimate of possible value, as there
is no active market for the options granted. The fair value of the options
granted in 1997, 1998 and 1999 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:
2000 1999 1998
------------ ------------ ------------
Net income as reported $ 8,680,511 $ 9,342,202 $ 8,968,415
Additional compensation for fair
value of stock options (237,252) (402,545) (237,396)
------------ ------------ ------------
Pro forma net income $ 8,443,259 $ 8,939,657 $ 8,731,019
============ ============ ============
Earnings per share
Basic
As reported $ 1.02 $ 1.10 $ 1.07
========= ========= ============
Pro forma $ .99 $ 1.06 $ 1.04
========= ========= ============
Diluted
As reported $ 1.01 $ 1.08 $ 1.05
========= ========= ============
Pro forma $ .98 $ 1.04 $ 1.02
========= ========= ============
Shares of Common Stock
------------------------ Weighted Average of
Available for Under Exercise Price of
Option/Award Plan Shares Under Plan
------------ ---- -----------------
Balance, March 31, 1997 281,097 389,613
Authorized - -
Granted (35,912) 35,912 4.56 - 18.625
Exercised - (62,369) 6.983 - 12.648
Lapsed 12,531 (12,531) 6.983 - 12.648
Expired (1,171) -
--------- ---------
Balance, March 31, 1998 256,545 350,625
Authorized - -
Granted (181,360) 181,360 4.56 - 13.25
Exercised - (8,764) 6.983 - 12.648
Lapsed 30,775 (30,775) 6.983 - 12.648
Expired -
--------- ---------
Balance, March 31, 1999 105,960 492,446
--------- ---------
Authorized
Granted (17,500) 17,500 9.375
Exercised - (114,141) 4.56 - 13.25
Lapsed 22,782 (22,782) 5.47 - 13.25
Expired (262) -
--------- ---------
Balance, March 31, 2000 110,980 373,023
========= =========
22
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 15 - STOCKHOLDERS' EQUITY (Continued)
Options Outstanding Options Exercisable
------------------------------------ -------------------------
Weighted
Average Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 5 to $ 10 97,623 4.161 years $ 7.91 80,123 $ 7.58
$10 to $ 15 275,400 7.069 years 11.92 164,704 11.40
At March 31, 2000, 484,463 shares of common stock were reserved for issuance
pursuant to stock plans, options and conversions of preferred stock.
NOTE 16 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share are as
follows:
2000 1999 1998
----------- ----------- -----------
Net income (numerator) $ 8,680,511 $ 9,342,202 $ 8,968,415
Shares used in the calculation
(denominators)
Basic earnings per weighted
average share outstanding 8,507,050 8,469,898 8,407,150
Effect of dilutive stock options 80,493 155,493 166,790
----------- ----------- -----------
Diluted shares 8,587,543 8,625,391 8,573,940
=========== =========== ===========
Basic earnings per share $ 1.02 $ 1.10 $ 1.07
======= ======= =======
Diluted earnings per share $ 1.01 $ 1.08 $ 1.05
======= ======= =======
NOTE 17 - COMMITMENTS AND CONTINGENCIES
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.
Long-Term Lease Commitments - The Company has entered into lease agreements
for certain parcels of land and branch offices. Future noncancelable lease
payments under these agreements are as follows for the years ending March 31:
2001 $ 140,178
2002 123,441
2003 74,592
2004 46,800
2005 19,008
Thereafter 219,372
---------
$ 623,391
=========
23
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 18 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers, and principal stockholders are Bank
customers and have had banking transactions with the Bank. All loans and
commitments to loan included in such transactions were made in compliance with
applicable laws on substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility
or present any other unfavorable features.
The aggregate balances and activity during 2000 and 1999 are as follows and
were within regulatory limitations:
2000 1999
----------- -----------
Balance, beginning of year $ 1,079,065 $ -
New loans or advances 6,178,373 1,118,571
Repayments (256,589) (39,496)
----------- -----------
Balance, end of year $ 7,000,849 $ 1,079,065
=========== ===========
Interest earned on loans was $75,396 in 2000.
Deposits from related parties totaled approximately $3,821,538 and $1,889,931
at March 31, 2000 and March 31, 1999, respectively.
NOTE 19 - 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 20 - 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.
Commitments to extend credit 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. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment; and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. Except
for certain long-term guarantees, the majority of guarantees expire in one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Collateral
supporting those commitments, for which collateral is deemed necessary,
generally amounts to one hundred percent of the commitment amount at March 31,
2000.
24
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 20 - FINANCIAL INSTRUMENTS (Continued)
The Bank has not been required to perform on any financial guarantees and has
not incurred any losses on its commitments in 2000, 1999 or 1998.
The following is a summary of the off-balance-sheet financial instruments or
contracts outstanding:
2000 1999 1998
------------ ------------- -------------
Commitments to extend credit $ 29,493,821 $ 29,715,621 $ 34,138,409
Credit card arrangements 3,050,931 2,919,639 2,431,351
Standby letters of credit 1,044,613 - 49,620
NOTE 21 - 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.
Accrued Income and Expense Accounts - Due to the short-term nature of these
amounts, recorded book value is believed to approximate fair 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.
Federal Home Loan Bank ("FHLB") Stock - FHLB Stock is carried at $100 par
value. This investment is considered restricted, as a minimum investment must
be maintained in order to obtain borrowing commitments from FHLB. The Company
may redeem its investment only at par value, which is used as the estimated
market value.
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, Repurchase Agreements and Other Borrowed Funds - 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, repurchase
agreements and other borrowed funds are estimated by discounting the estimated
future cash flows using the rates currently offered for these instruments with
similar remaining maturities.
Off-Balance-Sheet Instruments - The Company's off-balance-sheet instruments
include unfunded commitments to extend credit and borrowing facilities
available to the Company. 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.
25
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, 2000 and 1999 are as follows:
2000 1999
------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial Assets
Cash and cash
equivalents $ 16,043,055 $ 16,043,055 $ 10,889,530 $ 10,889,530
Investment
securities 15,072,096 15,067,065 27,946,819 27,990,620
Mortgage-backed
securities 59,045,058 58,923,944 55,923,356 56,172,804
Interest-bearing
deposits 3,960,522 3,960,522 15,572,363 15,572,363
Federal Home Loan
Bank stock 5,254,200 5,254,200 4,861,700 4,861,700
Loans receivable 589,583,539 570,952,554 533,649,169 537,829,527
Accrued interest
and dividends
receivable 4,391,961 4,391,961 4,087,010 4,087,010
Financial Liabilities
Demand and savings
deposits 176,249,928 176,249,928 177,321,954 177,321,954
Time deposits 388,077,157 391,191,518 360,083,458 362,835,651
Accounts payable and
accrued liabilities 9,813,095 9,813,095 5,814,394 5,814,394
Accrued interest
payable 169,369 169,369 220,553 220,553
Securities sold under
agreements to
repurchase 17,853,000 17,548,844 14,800,000 14,787,225
Other borrowed funds 22,000,000 21,914,200 7,918,151 7,916,651
NOTE 22 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
In Thousands
--------------------
2000 1999
-------- --------
Condensed balance sheet at March 31:
Cash $ 286 $ 98
Investment in bank 95,777 96,422
Other assets 865 747
-------- --------
$ 96,928 $ 97,267
======== ========
Other liabilities $ 993 $ 826
Stockholders' equity 95,935 96,441
-------- --------
$ 96,928 $ 97,267
======== ========
26
------------------------------------------------------------------------------
<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (Continued)
Condensed statement of income for the years ended March 31, 2000 and 1999:
In Thousands
--------------------
2000 1999
-------- --------
Income
Cash dividends from Bank subsidiary $ 7,257 $ 3,092
Interest 11 -
-------- --------
Total income 7,268 3,092
-------- --------
Expenses
Compensation 98 104
Other 371 318
-------- --------
Total expenses 469 422
-------- --------
Income before equity in undistributed income of
subsidiary and benefit equivalent to income taxes 6,799 2,670
Benefit equivalent to income taxes 94 81
-------- --------
Income before equity in undistributed income
of subsidiary 6,893 2,751
Equity in undistributed income of subsidiary 1,788 6,591
-------- --------
Net income $ 8,681 $ 9,342
======== ========
In Thousands
--------------------
2000 1999
-------- --------
Cash flows from operating activities
Net income $ 8,681 $ 9,342
Adjustments to reconcile net income to net
cash flows from operating activities
Equity in undistributed income of subsidiary (1,788) (6,591)
Other operating activities (120) (21)
-------- --------
Net cash flows from operating activities 6,773 2,730
-------- --------
Cash flows from investing activities
Other investing activities (133) -
-------- --------
Net cash flows from investing activities (133) -
-------- --------
Cash flows from financing activities
Sale of common stock 1,064 612
Dividends paid (3,825) (3,298)
Repurchase of common stock (3,691) (204)
-------- --------
Net cash flows from financing activities (6,452) (2,890)
-------- --------
Net change in cash 188 (160)
Cash, beginning of year 98 258
-------- --------
Cash, end of year $ 286 $ 98
======== ========
27
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<PAGE>
Horizon Financial Corp.
Notes to Consolidated Financial Statements
March 31, 2000, 1999 and 1998
------------------------------------------------------------------------------
NOTE 23 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Year Ended March 31, 2000
------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
Interest income $ 12,100,408 $ 12,209,532 $ 12,636,327 $ 13,001,010
Interest expense 6,299,886 6,325,903 6,671,897 6,959,206
------------ ------------ ------------ ------------
Net interest income 5,800,522 5,883,629 5,964,430 6,041,804
Provision for loan
losses 44,000 36,000 49,884 307,350
Other income 797,936 576,553 527,523 949,177
Other expenses 3,464,850 3,082,144 3,238,501 3,458,294
------------ ------------ ------------ ------------
Income from continuing
operations before
income tax 3,089,608 3,342,038 3,203,568 3,225,337
Federal income tax 1,006,222 1,188,269 1,010,736 974,813
------------ ------------ ------------ ------------
Net income $ 2,083,386 $ 2,153,769 $ 2,192,832 $ 2,250,524
============ ============ ============ ============
Basic earnings per
share (adjusted for
stock splits and
dividends) $ .25 $ .25 $ .26 $ .27
====== ====== ====== ======
Diluted earnings per
share (adjusted for
stock splits and
dividends) $ .24 $ .25 $ .25 $ .27
====== ====== ====== ======
Year Ended March 31, 1999
------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
Interest income $ 11,673,244 $ 12,312,963 $ 12,346,057 $ 12,234,723
Interest expense 6,226,278 6,371,916 6,414,934 6,254,002
------------ ------------ ------------ ------------
Net interest income 5,446,966 5,941,047 5,931,123 5,980,721
Provision for loan
losses 344,500 33,000 107,000 -
Other income 1,002,641 372,142 657,493 694,853
Other expenses 2,602,946 2,762,070 2,841,850 3,149,856
------------ ------------ ------------ ------------
Income from continuing
operations before
income tax 3,502,161 3,518,119 3,639,766 3,525,718
Federal income tax 1,189,391 1,195,354 1,234,282 1,224,535
------------ ------------ ------------ ------------
Net income $ 2,312,770 $ 2,322,765 $ 2,405,484 $ 2,301,183
============ ============ ============ ============
Basic earnings per
share (adjusted
for stock splits
and dividends) $ .27 $ .27 $ .28 $ .27
======== ======== ======== ========
Diluted earnings per
share (adjusted for
stock splits
and dividends) $ .27 $ .27 $ .28 $ .27
======== ======== ======== ========
28
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<PAGE>
REVOCABLE PROXY
HORIZON FINANCIAL CORP.
ANNUAL MEETING OF SHAREHOLDERS
July 25, 2000
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 25, 2000, 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
Gary E. Goodman
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 2000 ANNUAL
MEETING.
<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: , 2000
---------------------
--------------------------------- ---------------------------------
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, only one signature is required, but
each holder should sign, if possible.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
<PAGE>
