-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SKl5kugxCHgNVYuWO0XbGqRc/PKTu4heMDia9mgfCj2xbmdmWjx1XPgyvQYct7h/ kmdg5Xqj5cLUK1hxxSGGvA== 0000939057-97-000080.txt : 19970630 0000939057-97-000080.hdr.sgml : 19970630 ACCESSION NUMBER: 0000939057-97-000080 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORIZON FINANCIAL CORP CENTRAL INDEX KEY: 0001002682 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911695422 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-27062 FILM NUMBER: 97631819 BUSINESS ADDRESS: STREET 1: PO BOX 580 CITY: BELLINGHAM STATE: WA ZIP: 98225 BUSINESS PHONE: 3607333050 MAIL ADDRESS: STREET 1: PO BOX 580 CITY: BELLINGHAM STATE: WA ZIP: 98225 10-K405 1 HORIZON FINANCIAL CORP. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-27062 Horizon Financial Corp. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Chartered by the State of Washington 91-1695422 - --------------------------------------------- --------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 1500 Cornwall Avenue, Bellingham, Washington 98225 - --------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (360) 733-3050 Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO --- --- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. YES NO X --- --- The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing sales price of the registrant's Common Stock as quoted on the Nasdaq Stock Market under the symbol "HRZB" on June 6, 1997, was $111,666,431 (7,413,539 shares at $15.0625 per share). It is assumed for purposes of this calculation that none of the registrant's officers, directors and 5% stockholders are affiliates. DOCUMENT INCORPORATED BY REFERENCE Proxy Statement for the 1997 Annual Meeting of Stockholders. (Part II and III). PAGE PART I Item 1. Business - ----------------- (a) General ------- Horizon Financial Corp. ("Horizon Financial" or the "Corporation") was incorporated in the State of Washington in 1995 for the purpose of becoming a bank holding company for Horizon Bank, a savings bank ("Horizon Bank" or the "Bank"). On July 25, 1995, the stockholders of the Bank approved a plan to reorganize the Bank into the holding company form of ownership. The reorganization was completed on October 13, 1995, on which date the Bank became the wholly-owned subsidiary of the Corporation, and the stockholders of the Bank became stockholders of the Corporation. Prior to completion of the reorganization, the Corporation had no material assets or liabilities and engaged in no business activities. Subsequent to the acquisition of Horizon Bank, the Corporation has engaged in no significant activity other than holding the stock of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank. Horizon Bank was incorporated as a Washington state-chartered mutual savings bank in 1979 as a successor to Bellingham First Federal Savings and Loan Association, whose predecessor was originally organized in 1922 as a state-chartered savings and loan association which converted to a federal savings and loan association in 1934. The Bank is one of nine stock savings banks located in the State of Washington which are subject to regulation by the Washington Department of Financial Institutions, Division of Banks, and the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposit accounts are insured by the FDIC under the Bank Insurance Fund ("BIF"). The business of the Bank consists primarily of attracting savings deposits from the general public and originating first mortgage loans on residential properties. The Bank also makes first mortgage loans on commercial and multi-family residential properties, and, to a limited extent, loans secured by savings accounts and consumer loans. The Bank also invests in federal government and agency obligations, corporate notes and bonds, municipal bonds, common stock, preferred stock, money market instruments and mortgage-backed obligations. The Bank's principal sources of funds for lending and investment activities are savings deposits, repayment of loans, loan sales and borrowings. The Bank's principal sources of income are interest on loans and loan origination fees, commitment and servicing fees on loans, service charge income on accounts and interest and dividends on investment securities. Its principal expenses are interest paid on deposits, borrowings and general and administrative expenses. The Bank's savings and lending operations are conducted through twelve full-service office facilities located in Whatcom, Skagit and Snohomish counties in Washington State. The Bank's main office is located at 1500 Cornwall Avenue, Bellingham, Washington and its telephone number is (360) 733-3050. See "Item 2. Properties." 1 PAGE Selected Financial Data - ----------------------- The following table sets forth certain information concerning the financial position of the Bank at and for the dates indicated. March 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) Total Assets . . . . . . . . . $515,341 $488,968 $457,478 $424,637 $394,168 Loans Outstanding. . . . . . . 399,078 389,651 360,120 340,421 314,540 Cash and Investment Securities . . . . . . . . . 104,356 87,662 83,782 71,795 68,730 Deposits . . . . . . . . . . . 424,811 402,676 377,703 351,506 328,052 Borrowings . . . . . . . . . . -- -- -- -- -- Stockholders' Equity . . . . . 78,509 79,147 72,685 65,995 59,164 Number of Full Service Offices. . . . . . . . . . . 12 12 11 9 8
Year Ended March 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands) Interest Income. . . . . . . . $38,710 $37,082 $33,989 $33,619 $34,202 Interest Expense . . . . . . . (20,832) (20,773) (16,948) (15,227) (16,398) Net Interest Income. . . . . . 17,878 16,309 17,041 18,392 17,804 Other Income . . . . . . . . . 1,583 1,293 1,220 1,692 1,521 Non-interest Expense . . . . . (7,461) (6,685) (7,149) (7,446) (7,194) Provision for Loan Losses . . . . . . . . . . . (200) (110) (132) (368) (409) Income (Loss) Before ------- ------- ------- ------- ------- Taxes. . . . . . . . . . . . 11,800 10,807 10,980 12,270 11,722 Federal Income Tax . . . . . . 3,997 3,586 3,640 4,262 3,819 SFAS #109. . . . . . . . . . . -- -- -- -- 889 Gain on Sale of Trust Department. . . . . . . -- -- 181 -- -- ------- ------ ------- ------- ------- Net Income . . . . . . . . . . $ 7,803 $7,221 $ 7,521 $ 8,008 $ 7,014 ======= ====== ======= ======= =======
2 Key Operating Ratios - -------------------- The table below sets forth certain performance ratios of the Bank for the periods indicated. These ratios are calculated based on month end balances. At and for the Year Ended March 31, ---------------------- 1997 1996 1995 ---- ---- ---- Return on average assets (net income divided by average total assets). . . . . . . . . . . . . . . . . . . . . . 1.55% 1.53% 1.71% Return on average equity (net income divided by average equity) . . . . . . . . . . . . 9.90 9.51 10.85 Dividend payout ratio (dividends declared per share divided by net income per share) . . . . . . . . . . . . . 62.50 29.09 26.97 Equity to assets ratio (average equity dividend by average total assets). . . . . . . . . . . . . . . . . . . 15.70 16.04 15.72 Interest rate spread (difference between average yield on interest earning assets and average cost of interest bearing liabilities) . . . . . . . . . . . . . . . . . . . 2.98 2.85 3.40 Net yield on earning assets (net interest income as a percentage of average interest earning assets). . . . . . . . . . . . . . . . . . . . . . 3.72 3.61 4.06 Yields Earned and Rates Paid - ---------------------------- The Bank's pre-tax earnings depend primarily on its net interest income, the difference between the income it receives on its loan portfolio and other investments and its cost of money, consisting primarily of interest paid on savings deposits, and other borrowings. Net interest income is affected by (i) the difference between rates of interest earned on its interest-earning assets and rates paid on its interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of its interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. Thrift institutions have traditionally used interest rate spreads as a measure of net interest income. Another indicator of an institution's net interest income is its "net yield on interest-earning assets" which is net interest income divided by average interest earning assets. In an effort to make the yields on its loan portfolio and investments more interest rate sensitive, the Bank has implemented a number of measures, which are discussed herein under "-- Lending Activities." 3 PAGE The following table presents at the date and for the periods indicated, the total dollar amount of interest income and interest expense, as well as the resulting yields earned and rates paid. At March 31, Year Ended March 31, ---------------- ------------------------------------------------------------------------------ 1997 1997 1996 1995 ---------------- -------------------------- ------------------------- ------------------------ Aver- Aver- Aver- age age age Yield/ Average Yield/ Average Yield/ Average Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- ------- ------- -------- ------ ------- -------- ---- ------- -------- ------ (Dollars in thousands) Interest -earning assets: Loans receiv- able . . . $399,078 8.39% $403,056 $33,812 8.39% $375,018 $32,145 8.57% $352,620 $29,948 8.49% Investment securities . 42,789 6.27 46,850 2,937 6.27 53,849 3,359 6.24 45,410 2,533 5.58 Mortgage- backed securities . . 56,203 6.36 30,834 1,962 6.36 22,895 1,578 6.89 21,630 1,508 6.97 Total -------- ---- -------- ------- ---- -------- ------ ---- -------- ------- ---- interest- earning assets . . . 498,070 8.05 480,740 38,711 8.05 451,762 37,082 8.21 419,660 33,989 8.10 Interest- bearing liabilities: Deposits . . 424,811 5.07 410,267 20,832 5.07 386,860 20,773 5.36 361,690 16,948 4.70 Total -------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ---- interest- bearing liabilities. 424,811 5.07 410,267 20,832 5.07 386,860 20,773 5.36 361,690 16,948 4.70 -------- -------- ------- -------- ------- -------- ------- Net interest income. . . . 17,879 $16,309 $17,041 ------- ======= ======= Interest rate spread . . . . 2.98% 2.85% 3.40% ---- ----- ------ Net yield on interest -earning assets. . . . 3.72% 3.61% 4.06% ---- ====== ====== Ratio of average interest- earning assets to average interest- bearing liabili- ties. . . . . 115.09% 116.63% 116.28% ====== ====== ======
4 Rate/Volume Analysis - -------------------- The table below sets forth certain information regarding changes in interest income and interest expense for the Bank for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (change in volume multiplied by old rate); (2) changes in rates (change in rate multiplied by old volume); (3) changes to rate-volume (changes in rate multiplied by the change in volume). Year Ended March 31, ------------------------------------------------------------------------------------- 1997 vs. 1996 1996 vs. 1995 1995 vs. 1994 ------------------------------------------------------------------------------------- Increase (Decrease) Increase (Decrease) Increase (Decrease) Due to Due to Due to --------------------------- --------------------------- --------------------------- Rate/ Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total Volume Rate Volume Total ------ ---- ------ ----- ------ ---- ------ ----- ------ ---- ------ ----- (In thousands) Interest income: Interest and fees on loans. . . . . $2,388 $(671) $(50) $1,667 $1,898 $ 281 $ 18 $2,197 $2,277 $(2,362) $(177) $ (262) Investment securities and other interest -bearing securities . . 71 (108) (1) (38) 573 282 41 896 271 334 27 632 Total interest- earning assets . . . . $2,459 $(779) $(51) $1,629 $2,471 $ 563 $ 59 $3,093 $2,548 $(2,028) $(150) $ 370 ====== ===== ==== ====== ====== ====== ==== ====== ====== ======= ===== ====== Interest expense: Deposit accounts . . . $ 835 $(731) $(45) $ 59 $1,252 $2,398 $176 $3,826 $1,071 $ 607 $ 43 $1,721 ------ ----- ---- ------ ------ ------ ---- ------ ------ ------- ----- ------ Total interest -bearing liabilities. . $ 835 $(731) $(45) $ 59 $1,252 $2,398 $176 $3,826 $1,071 $ 607 $ 43 $1,721 ====== ===== ==== ====== ====== ====== ==== ====== ====== ======= ===== ======
5 Lending Activities - ------------------ General. The Bank's loan portfolio totaled $399,078,123 at March 31, 1997, representing approximately 77.44% of its total assets. On that date, 81.76% of total outstanding loans consisted of loans secured by mortgages on single family residential properties, 3.63% of the loans consisted of loans secured by two-to-four unit residential properties, 4.14% of total outstanding loans consisted of loans secured by mortgages on over four unit residential properties, and 6.27% of total outstanding loans consisted of commercial real estate loans. The balance of the Bank's outstanding loans at that date consisted of secured consumer loans and loans secured by savings deposits. The Bank originates both fixed rate and adjustable rate mortgages ("ARMs") secured by residential, business, and commercial real estate, the majority of which include building improvements. The Bank has no significant concentration of credit risk other than that a substantial portion of its loan portfolio is secured by real estate located in the Bank's primary market area, which the Bank considers to be Whatcom, Skagit and Shohomish Counties in Washington. This concentration of credit risk could have a material adverse effect on the Bank's financial condition and results of operations to the extent there is a material deterioration in the counties' economic and real estate values. In order to have the ability to make the yields on its loan portfolio and investments more interest rate sensitive, the Bank has implemented a number of measures. Those measures include: (i) adoption of a policy under which the Bank generally originates long-term, fixed-rate mortgage loans when such loans are written to specifications promulgated by the Federal Home Loan Mortgage Corporation ("FHLMC") and qualify for sale in the secondary market, (ii) origination of ARM loans on residential and commercial properties subject to market conditions, (iii) origination of construction loans secured by residential and income producing properties at interest rates subject to periodic adjustment based upon changes in a nationally recognized money market index and (iv) increased emphasis on originating 10 and 15 year amortizing mortgage loans. At March 31, 1997, $181,122,756 (or 45.39%) of the Bank's net mortgage loans receivable were comprised of loans that were other than long-term fixed-rate mortgage loans (i.e., loans with maturities greater than 15 years, which historically have been the industry's traditional area of lending activity). This amount consists of $15,490,484 in residential ARM loans and $10,332,670 in ARM loans secured by commercial and other real estate with adjustable rates; and $155,299,602 in 15 year or less amortizing mortgage loans. 6 PAGE Loan Maturity. The following table sets forth certain information at March 31, 1997 regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses. Due After Due After Due During 2 Through 5 Through Due Over the Year Ended 5 Years After 10 Years After 10 Years After March 31, March 31, March 31, March 31, --------------- ------------- -------------- -------------- 1998 1999 1997 1997 1997 Total ---- ---- ---- ---- ---- ----- (In thousands) Commercial, financial and agricultural . . . . . . $12,878 $1,906 $13,561 $12,920 $ 6,222 $ 47,487 Real estate construction . -- -- -- -- 18,808 18,808 Real estate-mortgage, installment and other . . 12,306 3,429 14,835 34,415 267,798 332,783 ------- ------ ------- ------- -------- -------- Total . . . . . . . . $25,184 $5,335 $28,396 $47,335 $292,828 $399,078 ======= ====== ======= ======= ======== ========
The following table sets forth the dollar amount of all loans due one year after March 31, 1997 which have fixed interest rates and have floating or adjustable interest rates. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income, and allowance for loan losses. Fixed Rates Adjustable Rates Total ----- ---------------- ----- (In thousands) Commercial, financial and agricultural. . . . . . . $2,545 $10,333 $12,878 Real estate construction . -- -- -- Real estate-mortgage, installment and other . . 3,934 8,372 12,306 ------ ------- ------- Total . . . . . . . . $6,479 $18,705 $25,184 ====== ======= =======
7 Residential Loans. The primary lending activity of the Bank has been the granting of conventional loans to enable borrowers to purchase existing homes or construct new homes. The Bank's real estate loan portfolio also includes loans on two-to-four family dwellings, multi-family housing (over four units), and loans made to purchase or refinance improved buildings to be used for residential housing. At March 31, 1997, approximately 85.39% of the Bank's total loan portfolio consisted of loans secured by residential real estate. The Bank's lending practices generally limit the maximum loan-to-value ratio on one-to-four family residential mortgage loans to 95% of the appraised value as determined by an independent appraiser, with the condition that private mortgage insurance generally be required on any home loans with loan-to-value ratios in excess of 80% of the appraised value. The Bank places this insurance with carriers approved by the FHLMC. The coverage generally limits the Bank's exposure to 72% of the loan amount. If private mortgage insurance is required, the borrower pays the premium at loan closing and any recurring premiums through an escrow reserve account established with the Bank for such period of time as the Bank requires the insurance coverage to be in force. Multi-family residential and commercial real estate loans, construction loans and unimproved real estate loans generally do not exceed 80% of appraised value. The Bank presently originates both fixed-rate and ARMs secured by one-to-four family properties with a loan term not exceeding 30 years. Under certain conditions, ARM borrowers are allowed to convert beginning on the first interest rate change date and ending on the fifth interest rate change date from the date of the loan note. In addition, certain consumer safeguards are built into the ARM instruments used by the Bank. These safeguards include limits on annual and lifetime interest rate adjustments. The Bank generally originates these loans in accordance with guidelines established by the FHLMC. For the fiscal year ended March 31, 1997, adjustable mortgage loans totalled $11,446,235 or 10.39% of total originations as compared to $14,057,805 or 14.60% of total originations for the year ended March 31, 1996. Construction Loans. The Bank also provides construction financing for single-family dwellings and to a lesser extent makes land acquisition and development loans on properties intended for residential use. The interest rate charged by the Bank on these loans varies depending upon the type of security property and the creditworthiness of the borrower. The origination fees charged by the Bank on construction loans generally are from one-quarter to one percentage point higher than fees charged by the Bank for permanent financing. At March 31, 1997 the Bank had $18,808,232, or 4.71% of total loans outstanding in construction loans, as compared to $15,711,393, or 4.03% of total loans at March 31, 1996. At March 31, 1997, $5,624,436 or 1.41% of the construction loan portfolio consisted of "speculative" construction loans (i.e., loans on dwellings for which there is not an underlying contract for sales). Construction lending is generally considered to involve a higher level of risk as compared to one- to four-family residential permanent lending because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of value proves to be inaccurate, the Bank may be confronted at, or prior to, the maturity of the loan, with a project whose value is insufficient to assure full repayment. Loans for the construction of speculative homes carry more risk because the payoff for the loan is dependent on the builder's ability to sell the property prior to the time that the construction loan is due. Multi-Family, Business and Commercial Loans. These types of loans constituted $40,379,050 or approximately 10.12% of Horizon Bank's loan portfolio at March 31, 1997. These loans include fixed rate and adjustable rate mortgages secured by apartment buildings (i.e., those containing five or more living units) and business and commercial properties. The Bank generally requires that such 8 loans have a debt service coverage of 1.20 to 1 with a loan-to-value ratio not exceeding 80%. Fixed-rate loans generally have a five to 10-year loan term, with payments based upon a 15 to 30-year amortization schedule. At March 31, 1997, $12,026,110 of loans secured by income-producing properties have an interest rate which adjusts annually based upon changes in an index of United States Treasury securities published by the Board of Governors of the Federal Reserve System ("Federal Reserve"). The amount of any increase in the interest rate is generally limited to two percentage points (upward or downward) each adjustment period, with a limit of six percentage points on the amount which the interest rate can increase or decrease over the life of the loan. Multi-family residential and business and commercial real estate lending is generally considered to involve a higher degree of risk than permanent residential one- to four-family lending. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. Horizon Bank generally attempts to mitigate the risks associated with multi-family commercial and residential real estate lending by, among other things, lending on collateral located in its market area and generally to individuals who reside in its market. Consumer Loans. The Bank makes a variety of loans for consumer purposes. Included among these are home equity loans, home equity lines of credit, loans secured by personal property, such as automobiles, boats, and other vehicles, loans secured by a Horizon Bank's Certificate of Deposit, and loans for mobile homes located in parks. Horizon Bank actively markets consumer loans in order to provide a wider range of financial services to its customers and to achieve shorter terms and higher interest rates normally typical of such loans. At March 31, 1997, the Bank held $17,219,233 of consumer loans. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, boats and other vehicles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. Consumer loans are made based on an evaluation of the borrower's creditworthiness, including income, other indebtedness, and satisfactory credit history, and the value of the collateral. Designated managers or Loan Committee members approve consumer loan requests. Secured loan amounts typically do not exceed 80% of the value of the collateral, or 80% of the appraised value of the residence in the case of home equity loans. Loan Solicitation and Processing. The primary sources for loan originations are attributable to deposit customers, current borrowers, walk-in customers, and referrals from real estate agents and builders. The Bank does not 9 currently purchase loans from, or otherwise utilize, mortgage brokers in the origination of loans. The Bank accepts completed loan applications from all of its branches. Processing is performed at the branch level by the branch manager or a processor working under the direction of the branch manager. Detailed information is obtained to determine the creditworthiness of the borrower and the borrower's ability to repay. The more significant items appearing on the applications and accompanying material are verified through the use of written credit reports, financial statements, and confirmations. After analysis of the loan application, supporting documents and the property to be pledged as loan security, including an appraisal of the property by either a staff appraiser or an independent fee appraiser, branch managers not having loan approval authority will forward the application with a written recommendation to the Bank's Loan Committee. Loan approval requires the signatures of two members of the Loan Committee. The Loan Committee consists of officers of the Bank who are appointed by the Bank's Board of Directors. The Bank generally requires its mortgage notes to be co-signed individually by the principals on all loans made to entities other than natural persons. Certain lending personnel have been given limited loan approval authority by the Board of Directors covering secondary market quality loans not exceeding 80% loan to value. Loan assumption requests of adjustable rate loans are handled by the Bank in a manner similar to new loan requests. FHLMC standards are generally applied to each request and full credit underwriting is required. For fixed rate loans, a sale or transfer of the secured property generally results in the Bank enforcing its due on transfer rights contained in the mortgage instrument. Loan Originations, Purchases and Sales. The Bank's current emphasis is on originating intermediate and long-term fixed rate loans on terms and conditions which will permit them to be sold in the secondary market, while originating ARM and 10, 15 and 20 year fixed-rate loans for its own portfolio. In addition to originating loans, Horizon Bank has purchased real estate loans in the secondary market. The Bank's purchases in the secondary market depend upon the demand for mortgage credit in the local market area and the inflow of funds from traditional sources. Loan purchases enable the Bank to utilize funds more quickly, particularly where sufficient loan demand is not obtainable locally. The Bank is a qualified servicer for both FHLMC and the Federal National Mortgage Association. The Bank's general practice is to close its fixed-rate, one-to-four family residential loans on FHLMC loan documents in order to facilitate future sales to the mortgage corporation as well as to other institutional investors. From time to time, depending upon interest rates and economic conditions, the Bank has sold participation interests in loans in order to provide additional funds for lending to generate servicing fee income and to decrease the dollar amount of its intermediate and long-term fixed-rate loans. The sale of loans in the secondary mortgage market reduces the Bank's interest rate risk and allows the Bank to continue to make loans during periods when savings flows decline or funds are otherwise unavailable for lending purposes. In connection with such sales, the Bank generally retains the servicing of the loans (i.e., collection of principal and interest payments), for which it generally receives a fee payable monthly of .25% to .375% per annum of the unpaid balance of each loan. As of March 31, 1997, the Bank was servicing loans for others aggregating approximately $83,742,111. All sales of loan interests by the Bank are made without right of recourse to the Bank by the buyer of the loan interests in the event of default by the borrower. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," which is effective for years beginning after December 15, 10 1995. This statement requires mortgage servicers to recognize servicing rights on loans as separate assets, no matter how acquired. When the Bank sells loans and retains the servicing rights it will be required to allocate the total cost of the loans between servicing rights and loans based on their relative fair values if their values can be estimated. SFAS No. 122 was effective for and was adopted by the Bank beginning April 1996. SFAS No. 122 will not be applied retroactively. Management does not believe the adoption of this statement will have a material impact on the Bank's financial condition or results of operations. Loan Commitments. Horizon Bank issues commitments to originate conventional mortgage loans on existing residential dwellings are made for periods up to 60 days from the date of loan application and are based upon the prevailing market rate at the time of application. At March 31, 1997, such commitments amounted to $2,523,820. Loan Origination and Other Fees. In addition to interest earned on loans, the Bank receives loan origination fees for originating loans. Loan origination fees are a percentage of the principal amount of the mortgage loan which are charged to the borrower at the closing of the loan. The Bank's loan origination fees are generally 0% to 2.50% on conventional residential mortgages and 2.0% to 2.5% for commercial real estate loans. The total amount of deferred loan origination fees and unearned discounts at March 31, 1997 was $6,835,376. Any unamortized loan fees are recognized as income at the time the loan is sold or paid off. Income from loan origination and commitment fees varies with the volume and type of loans and commitments made and purchased and with competitive conditions in mortgage markets, which in turn responds to the demand for and availability of money. The Bank has experienced a decrease in loan fee income during periods of unusually high interest rates due to the resulting lack of demand for mortgage loans. The Bank also receives other fees and income from charges relating to existing loans, which include late charges, and fees collected in connection with a change in terms or other loan modifications. These fees and charges have not constituted a material source of income. Loan Modifications. The Bank offers a loan modification program to assist customers who were considering refinancing their home loans. For a 2% loan fee the Bank will modify customers' loans under the program. No new principal is required and only the interest rate and payment amounts are changed. All other terms and conditions remain the same. In fiscal 1997, the Bank modified $1,116,175 of real estate loans, compared to $6,640,084 in fiscal 1996. Delinquent Loans, Loans in Foreclosure and Foreclosed Property. Real estate loans are defined as delinquent when any payment of principal and/or interest is past due. While generally the Bank is able to work out a satisfactory repayment schedule with a delinquent borrower, the Bank generally will undertake foreclosure proceedings if the delinquency is not otherwise resolved within 90 days. Property acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as "real estate owned" until such time as it is sold or otherwise disposed of. At March 31, 1997, the Bank had one loan over 90 days delinquent with a balance of $38,918. Management does not anticipate incurring material losses from this loan Delinquent loans have been consistently low over the last three fiscal years due to a strong local economy and strong underwriting. No assurances, however, can be given as to future delinquency levels and the continued strength of the local economy. 11 PAGE The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated. At March 31, --------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Non-accrual loans. . . $ -- $ -- $ -- $ -- $ -- Loans 90 days or more delinquent and accruing interest . . 38,918 -- 1,545 -- -- Restructured loans . . -- -- -- -- -- Real estate acquired through foreclosure . -- -- -- -- -- ------- ----- ------ ------- ------ Total. . . . . . . . $38,918 $ -- $1,545 $ -- $ -- ======= ===== ====== ======= ====== As a percentage of net loans . . . . . . . . .010% -- .0004% -- -- As a percentage of total assets. . . . . .008% -- .0003% -- -- Reserves for Losses. The Bank operates under a general loan loss reserve system. Any differences between the loss reserve and the amount of loss realized is charged or credited to current income. The provision for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The reserve is based upon factors and trends identified by management at the time financial statements are prepared, but the ultimate recovery of loans is susceptible to future market factors beyond the Bank's control, which may result in losses or recoveries differing significantly from those provided for in the financial statements. The Bank established an allowance for losses for the year ended March 31, 1997 in the amount of $3,406,150 and $3,236,150 for the year ended March 31, 1996. The Bank's loan loss reserve as of March 31, 1997, is approximately .85% of total loans receivable. The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated. Year Ended March 31, ------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance at beginning of period. . . $3,236,150 $3,126,150 $2,994,150 $2,626,348 $2,217,612 Provision for loan losses . . . 200,400 110,000 132,000 367,802 408,736 Adjustment to reserves . . (30,400) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance at end of period . . $3,406,150 $3,236,150 $3,126,150 $2,994,150 $2,626,348 ========== ========== ========== ========== ========== Ratio of net charge offs to average loans outstanding during the period . . . . .05% .03% .04% .11% .13% 12 The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. See "-- Reserves for Losses" above for a discussion above regarding the change in fiscal 1992 from a specific loan loss reserve system to a general loan loss reserve system. Year Ended March 31, --------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Commercial, financial and agricultural. . $ 800,000 $ 800,000 $ 858,000 $ 858,000 $ 758,000 Real estate - construc- tion. . . . . -- -- -- -- -- Real estate - mortgage. . 2,606,150 2,436,150 2,268,150 2,136,150 1,868,348 ---------- ---------- ---------- ---------- ---------- Total allowance for loan losses . . . $3,406,150 $3,236,150 $3,126,150 $2,994,150 $2,626,348 ========== ========== ========== ========== ========== The Bank had no allowances for real estate acquired through foreclosure at March 31, 1997, 1996, 1995, 1994 and 1993. Investment Activities - --------------------- Under Washington law, savings banks are permitted to own U.S. government and government agency obligations, commercial paper, corporate bonds, mutual fund shares, debt and equity obligations issued by creditworthy entities, whether traded on public securities exchanges or placed privately for investment purposes. The Bank holds a diverse portfolio of money market instruments, United States Treasury obligations, federal agency securities, common stock, preferred stock and corporate notes. The FDIC has adopted the Federal Financial Institutions Examination Council statement of policy on securities activities and accounting procedures. This policy requires that institutions establish prudent policies and strategies for securities activities, identify certain securities trading practices that are unsuitable for an investment portfolio, recommends procedures for selection of a securities dealer, and limits investment in high risk mortgage securities and disproportionately large holdings of long-term zero coupon bonds. The policy addresses concerns about speculative or other non-investment activities in the securities investment portfolios of depository institutions. Speculative securities activities can impair earnings or capital and, in some cases, may cause the failure of the institution. The policy establishes a framework for structuring securities activities and clarifies various accounting issues concerning investment accounts versus trading accounts. The book value of the above investments at March 31, 1997 was $32,390,741 compared to a market value of $34,670,775. For further information concerning the Bank's investment securities portfolio, see Note 3 of the Notes to the Consolidated Financial Statements. The Bank also invests in mortgage-backed securities. At March 31, 1997, such securities had a book value of $56,202,898 and a market value of $54,650,245. 13 The following table presents the carrying (book) value of the Bank's investment securities portfolio and short-term investments. The market value of the Bank's investment securities portfolio at March 31, 1997, was approximately $89,321,020. This does not include interest-bearing deposits and cash equivalents. At March 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- (In thousands) Investment securities: U.S. Government, agency securities, state and political subdivisions. . $ 26,914 $39,408 $31,614 Asset-backed securities . . 56,203 23,364 23,405 Other securities . . . . . 5,477 8,862 11,095 -------- ------- ------- Total investments. . . . 88,594 71,634 66,114 Interest bearing deposits and cash equivalents . . . . . . . 14,815 13,600 16,557 -------- ------- ------- $103,409 $85,234 $82,671 ======== ======= ======= 14 PAGE The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Bank's investment securities at March 31, 1997. At March 31, 1997 ----------------------------------------------------------------------------- Total One Year One to Five Five to Ten More than Investment or Less Years Years Ten Years Securities ------------ ------------ ------------ ------------ --------------------- Carry- Aver- Carry- Aver- Carry- Aver- Carry- Aver- Carry- Aver- ing age ing age ing age ing age ing Market age Value Yield Value Yield Value Yield Value Yield Value Value Yield ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ----- (Dollars in thousands) U.S. Government, agency securities, state and political subdivisions. . . . .$ 8,242 5.85% $16,259 6.12% $2,413 7.97% $ -- --% $26,914 $26,885 6.21% Mortgage-backed securities. . . . . . -- -- 5,939 6.38 3,203 6.47 47,061 6.80 56,203 54,650 6.74 Other. . . . . . . . . 3,407 4.49 1,492 8.01 578 6.50 -- -- 5,477 7,786 5.32 ------- ---- ------- ---- ------ ---- ------- ---- ------- ------- ---- Total . . . . . . .$11,649 5.30% $23,690 6.31% $6,194 7.03% $47,061 6.80% $88,594 $89,321 6.46% ======= ==== ======= ==== ====== ==== ======= ==== ======= ======= ====
15 Savings Activities and Other Sources of Funds - --------------------------------------------- General. Savings accounts and other types of deposits have traditionally been an important source of the Bank's funds for use in lending and for other general business purposes. In addition to savings accounts, the Bank derives funds from loan repayments, loan sales, Federal Reserve borrowings, and other borrowings and operations. The availability of funds from loan sales is influenced by general interest rates and other market conditions. Loan repayments are a relatively stable source of funds while deposit inflows and outflows vary widely and are influenced by prevailing interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer term basis to support expanded lending activities. Deposits. Horizon Bank offers several deposit accounts, including Regular Passbook and Statement Savings Accounts, Checking Accounts, Money Market with and without Check Access and Certificates of Deposit Accounts with maturities ranging from thirty days up to 10 years. Certificates of Deposit account requirements vary according to minimum principal balances, the time period the funds must remain on deposit and the interest rate determined for each term and minimum balance. The following table sets forth certain information concerning the deposits at the Bank. Year Ended March 31, ---------------------------------------------------------- 1997 1996 1995 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Average Average Average Type Balance Rat Balance Rate Balance Rate - ---- ------- --------- ------- -------- -------- -------- (Dollars in thousands) Savings $ 30,164 3.45% $ 29,324 3.46% $ 33,939 3.35% Drafts 25,482 1.68 24,274 1.93 24,697 2.26 Money Market 52,334 4.15 44,181 4.48 42,146 3.84 Time Deposits 302,287 5.72 289,081 6.02 260,908 5.26 -------- ---- --------- ---- --------- ---- Total $410,267 5.10% $ 386,860 5.39% $ 361,690 4.71% ======== ==== ========= ==== ========= ==== The following table indicates the amount of the Bank's deposits by time remaining until maturity as of March 31, 1997 in excess of $100,000. Certificates Maturity Period of Deposit --------------- ------------ Three months or less $12,170,025 Three through six months 12,497,119 Six through twelve months 17,902,142 Over twelve months 29,849,668 ----------- Total $72,418,954 =========== The Bank has increasingly relied upon deregulated fixed-rate certificate accounts and other new regulatory authorized types of deposits. The Bank has a number of different programs designed to attract both short-term and long-term savings of the general public by providing a wide assortment of accounts and rates. The program includes traditional passbook accounts; nonnegotiable time deposits with minimum deposits of $100,000 and terms of 30 days to 10 years called Jumbo Certificates of Deposit; nonnegotiable, nontransferable time deposits with minimum deposits of $500 and terms from 30 days to 10 years at fixed rates; 18-month to 10-year variable rate fixed term certificates; Individual Retirement Accounts (IRAs); Qualified Retirement Plans; transaction accounts such as regular checking; MMDAs with and without limited check access. 16 The Bank's practice on early withdrawal penalties is applicable only to time deposits. Management believes that in periods of rising interest rates this practice will discourage depositors from making premature withdrawals for the purpose of reinvesting in higher rate time deposits. The minimum amount required to open a time deposit varies from $500 to $100,000, depending on the type of time deposit. Pricing of rates on time deposits with maturities from thirty days to ten years are determined periodically by the Bank, based upon competitive rates and local market rates, national money market rates, and yields on assets of the same maturity. The Bank's MMDA currently has a $1,000 minimum deposit and has a tiered pricing program, with interest rates that vary by account dollar balance--$2,000, $10,000, $25,000 and higher. This account has no maturity requirements, no regulatory interest rate ceiling, and limited check writing privileges. The interest rate on the account is adjusted by the bank weekly, based on money market conditions. The Bank currently has a $10,000 minimum deposit (MMK) money market and has a tiered pricing program, with interest rates that vary by account dollar balance...$10,000, $25,000, $50,000 and higher. This account has no maturity requirements, no regulatory interest rate ceiling, and no check writing privileges. The interest rates on the account are adjusted by the Bank weekly or as dictated by money market conditions. The large variety of deposit accounts offered by the Bank has increased the Bank's ability to retain deposits and has allowed it to be competitive in obtaining new funds, although the threat of disintermediation (the flow of funds away from the Bank into direct investment vehicles, such as government and corporate securities) still exists. The ability of the Bank to attract and retain deposits and the Bank's cost of funds have been, and will continue to be, significantly affected by capital and money market conditions. Horizon Bank attempts to control the flow of deposits by pricing its accounts to remain competitive with other financial institutions in its market area but does not necessarily seek to match the highest rates paid by competing institutions. The senior officers of the Bank meet periodically to determine the interest rates which the Bank will offer to the general public. Such officers consider the amount of funds needed by the Bank on both a short-term and long-term basis, the rates being offered by the Bank's competitors, alternative sources of funds and the projected level of interest rates in the future. The Bank's deposits are obtained primarily from residents of Northwest Washington. Horizon Bank attracts deposits by offering a wide variety of services and convenient branch locations and service hours. The Bank has not solicited brokered deposits and has no present intention to attract such deposits in the future. For further information concerning the Bank's savings deposits, reference is made to Note _ of the Notes to the Consolidated Financial Statements. Borrowings. Savings deposits and access to a line of credit from the discount window of the Federal Reserve Bank of San Francisco are available to the Bank. If additional borrowings are needed, the Bank may do repurchase agreements, term fed funds, or additional public funds deposits. The Bank has no borrowings against any kind of credit as of March 31, 1997. Horizon Bank has had no borrowings for the last five fiscal years. 17 Competition - ----------- The Bank faces substantial competition in its market area in originating loans and attracting deposits. Competition in originating loans is primarily from other thrift institutions, commercial banks, mortgage companies, credit unions and consumer finance companies. The Bank competes for loan originations primarily through interest rates and loan fees it charges and through the efficiency and quality of services it provides borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions and current interest rate levels. In attracting deposits, the Bank competes primarily with other thrift institutions, commercial banks and credit unions. The Bank competes for customer deposits principally on the basis of convenience and quality of its banking services and the investment opportunities that satisfy the requirements of investors with respect to rate of return, liquidity, risk and other factors. The primary factors in competing for deposits are interest rates and the convenience of office locations. In light of the recent deregulation of interest rate controls on deposits, the Bank anticipates that it will face increasing competition for deposits from commercial banks, other thrift institutions and non-regulated financial intermediaries. Personnel - --------- At March 31, 1997, Horizon Bank employed 112 full-time and 18 part-time employees. Horizon Bank employees are not represented by any collective bargaining agreement. Management of Horizon Bank considers its relations with its employees to be good. REGULATION AND SUPERVISION The Bank - -------- General. As a state-chartered, federally insured bank, Horizon Bank is subject to extensive federal and state regulation. Lending activities and other investments must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. Horizon Bank is regularly examined by the FDIC and the Washington Department of Financial Institutions, Division of Banks, and files periodic reports concerning the Bank's activities and financial condition with its regulators. The Bank's relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in such matters as the ownership of savings accounts and the form and content of mortgage documents. The law and regulations of the State of Washington pertaining to banks and other corporations apply to the Bank. Among other things, those laws and regulations govern the Bank's investments and borrowings, loans, payment of interest and dividends, and establishment and relocation of branch offices. Deposit Insurance. Deposit accounts at the Bank are insured up to applicable limits by the FDIC under the BIF. As an insurer, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises and regulates the operations of state-chartered banks that are not members of the Federal Reserve System. FDIC approval is required prior to any merger or consolidation involving state, nonmember banks, or the establishment or relocation of an office facility thereof. FDIC supervision and regulation is intended primarily for the protection of depositors and the FDIC insurance funds. Pursuant to provisions in the Federal Deposit Insurance Act ("FDI Act"), all BIF-insured banks must pay semiannual insurance assessments. The Bank's assessments for the year ended March 31, 1997, equalled $14,297. 18 As a result of the BIF having reached its designated reserve ratio, effective January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the BIF. Under the new assessment schedule, rates were reduced to arrange of 0 to 27 basis points, with approximately 92% of BIF members paying the statutory minimum annual assessment rate of $2,000. As a well capitalized bank, the Bank qualified for the minimum statutory assessment during fiscal 1997. On September 30, 1996, the Deposit Insurance Fund Act was enacted to assist depository institutions insured by the Savings Association Insurance Fund ("SAIF") in meeting its designated reserve ratio. Pursuant to the Act, the FDIC imposed an assessment on FDIC-insured financial institutions beginning January 1, 1997, for the purpose of paying interest on the obligations issued by the Financing Corporation in the 1980's to help fund the thrift industry cleanup. BIF-assessable deposits will be charged an assessment at a rate of approximately 0.013% until the earlier of December 31, 1999, or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. Any insured bank which does not operate in accordance with or conform to FDIC regulations, policies and directives may be sanctioned for non-compliance. For example, proceedings may be instituted against any insured bank or any director, officer, or employee of such bank who engages in unsafe and unsound practices, including the violation of applicable laws and regulations. The FDIC has the authority to terminate deposit insurance pursuant to procedures established for that purpose. Capital Requirements. Pursuant to FDIC regulations, a bank's qualifying total capital base consists of two types of capital elements: "Core capital" (Tier 1) and "supplementary capital" (Tier 2). To qualify as an element of Tier 1 or Tier 2 capital, a capital instrument should not contain or be subject to any conditions, covenants, terms restrictions, or provisions that are inconsistent with safe and sound banking practices. The Bank must maintain a ratio of Tier 1 capital to total assets of not less than 4 percent, as discussed below. At March 31, 1997, Horizon Bank had a ratio of Tier 1 capital to total assets of 15.20%. These capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally sound, which are well-managed and have no material or significant financial weaknesses. The FDIC capital regulations state that, where the FDIC determines that the financial history or condition, managerial resources and/or the future earnings prospects of a bank are not adequate, or where a bank has sizable off-balance sheet or funding risks, significant risks from concentrations of credit or nontraditional activities, excessive interest risk rate exposure, or a significant volume of assets classified substandard, doubtful or loss or otherwise criticized, the FDIC may determine that the minimum adequate amount of capital for that bank is greater than the minimum standards established by regulation. Core (Tier 1) capital is defined as the sum of core capital elements of common stockholders' equity (which includes common stock and related surplus, undivided profits, disclosed capital reserves that represent a segregation of undivided profits, and foreign currency translation adjustments, less net unrealized holding losses on available-for-sale equity securities with readily determinable fair values), noncumulative perpetual preferred stock including any related surplus, and minority interests in the equity capital accounts of consolidated subsidiaries, minus all intangible assets other than mortgage servicing rights and purchased credit card relationships and minus any disallowed deferred tax assets. 19 Supplementary (Tier 2) capital includes allowances for loan and lease losses, up to a maximum of 1.25 percent of risk-weighted assets, cumulative perpetual preferred stock, long-term preferred stock (original maturity of at least 20 years) and any related surplus; perpetual preferred stock (and any related surplus) where the dividend is reset periodically based, in whole or part, on the bank's current credit standing, regardless of whether the dividends are cumulative or noncumulative; hybrid capital instruments, including mandatory convertible debt securities; and term subordinated debt and intermediated-term preferred stock (original average maturity of five years or more) and any related surplus. Supplementary capital does not include revaluation reserves or hidden reserve that represent unrealized appreciation on assets such as bank premises and equity securities. Minimum Leverage Capital Requirement. Under the FDIC's capital regulations the most highly-rated institutions are required to meet a "Tier 1" leverage capital ratio of at least three percent of total assets. Tier 1 (or "core capital") consists of common equity stock minus all intangible assets other than limited amounts of purchased mortgage servicing rights. All other banks must have a Tier 1 leverage ratio of at least 100 to 200 basis points above the three percent minimum. The FDIC's capital regulations also establish a minimum leverage ratio of not less than four percent for banks that are not highly rated or are anticipating or experiencing significant growth. Based on the definitions contained in the FDIC's capital regulations, as of March 31, 1997, Horizon had Tier 1 capital of 15.20%. The FDIC's capital regulation also requires higher capital levels for banks which exhibit more than a moderate degree of risk or exhibit other characteristics which necessitate that higher than minimum levels of capital be maintained. The FDIC's capital regulations further provide that any insured bank with a Tier 1 capital to total assets ratio of less than two percent is considered to be operating in an unsafe and unsound condition pursuant to Section 8(a) of the FDI Act unless the insured bank enters into a written agreement, to which the FDIC is a party, to correct its capital deficiency. Insured banks operating with Tier 1 capital levels below two percent (and which have not entered into a written agreement) are subject to an insurance removal action. Insured banks operating with lower than the prescribed minimum capital levels, generally will not receive approval of applications submitted to the FDIC. Also, inadequately capitalized state nonmember banks will be subject to such administrative action as the FDIC deems necessary. A state nonmember bank that is below the minimum leverage requirement will be deemed to be engaging in an "unsafe or unsound practice" that could result in an FDIC enforcement action unless the bank complies with a capital plan approved by the FDIC. Risk Based Capital. The FDIC has adopted a "Statement of Policy on Risk-Based Capital" to supplement its existing capital regulations. The Federal Reserve and the Office of the Comptroller of the Currency also have adopted substantially similar risk-based capital rules. The Statement of Policy consists of: a definition of capital for risk-based capital purposes, a system for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories, and a schedule specifying a phase-in period for achieving a minimum supervisory ratio of capital-to-risk-weighted assets. According to the Statement of Policy, a bank's risk-based capital is calculated by dividing its qualifying total capital base by its risk-weighted assets. A bank's qualifying total capital base consists of "core capital" (or "Tier 1" capital) and "supplemental capital" (or "Tier 2" capital). The Statement of Policy specifies the components of each category. On March 31, 1997, Horizon Bank's risk-based capital ratio was 30.43 percent. Federal Reserve System. The Federal Reserve Board requires (under "Regulation D") that all depository institutions, including savings banks, 20 maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest bearing deposits with the regional Federal Reserve Bank. NOW accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a savings bank. Under Regulation D, a bank must establish reserves equal to 0% of the first $4.4 million of net transaction accounts, 3% of the next $44.9 million, and 10% plus $1.56 million of the remainder. The reserve requirement on non-personal time deposits with original maturities of less than 1.5 years is 0%. As of March 31, 1997, the Bank's deposit with the Federal Reserve Bank and vault cash exceeded the Bank's reserve requirements. Prompt Corrective Action. Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measure, which include a risk-based capital measure, a leverage ratio capital measure, and certain other factors. The federal banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a leverage ratio of not less than 4%. Any institution which is neither well capitalized nor adequately capitalized will be considered undercapitalized. Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by the Bank to comply with applicable capital requirements would, if unremedied, result in restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. The Corporation - --------------- General. The Corporation, as the sole shareholder of the Bank, is a bank holding company and has registered as such with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act, as amended (the "BHCA"), and the regulations of the Federal Reserve. As a bank holding company, the Corporation is required to file with the Federal Reserve annual reports and such additional information as the Federal Reserve may require and will be subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it 21 would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the Federal Reserve includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company, performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company's capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve pursuant to the FDIC Improvement Act, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." Bank holding companies, except for certain "well-capitalized" bank holding companies, are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption of it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by, or written agreement with, the Federal Reserve. Capital Requirements. The Federal Reserve has established capital requirements for bank holding companies that generally parallel the capital requirements for national banks under the Office of the Comptroller of the Currency's regulations. Under the Federal Reserve Board's capital guidelines, the Corporation's levels of consolidated regulatory capital exceed the Federal Reserve's minimum requirements, as follows: 22 Amount Percent ------ ------- (Dollars in Thousands) Tier 1 Capital $78,384 15.60% Minimum Tier 1 (leverage) requirement 20,086 4.00 ------- ----- Excess 58,298 11.60% ======= ===== Risk-based capital $80,951 30.43% Minimum risk-based capital requirement 21,279 8.00 ------- ----- Excess $59,672 22.43% ======= ===== TAXATION Federal Taxation - ---------------- General. The Corporation and the Bank report their consolidated income on a fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Corporation. Reference is made to Note 10 of the Notes to the Consolidated Financial Statements contained in the Proxy Statement for additional information concerning the income taxes payable by the Bank. Tax Bad Debt Reserves. For taxable years beginning prior to January 1, 1996, savings institutions such as the Bank which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts") were permitted to establish a reserve for bad debts and to make annual additions thereto, which additions may, within specified formula limits, have been deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, may have been computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8 percent of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the nonqualifying reserve. The Bank's deduction with respect to nonqualifying loans was computed under the experience method, which essentially allows a deduction based on the Bank's actual loss experience over a period of several years. Each year the Bank selected the most favorable way to calculate the deduction attributable to an addition to the tax bad debt reserve. Recently enacted legislation repealed the reserve method of accounting for bad debt reserves for tax years beginning after December 31, 1995. As result, savings associations will no longer be able to calculate their deduction for bad debts using the percentage-of-taxable-income method. Instead, savings associations will be required to compute their deduction based on specific charge-offs during the taxable year or, if the savings association or its controlled group had assets of less than $500 million, based on actual loss experience over a period of years. This legislation also requires savings associations to recapture into income over a six-year period their post-1987 additions to their bad debt tax reserves, thereby generating additional tax liability. At March 31, 1997, the Bank's post-1987 reserves totalled approximately $5,782,000. The recapture may be suspended for up to two years if, during those years, the institution satisfies a residential loan requirement. The Bank anticipates that it will meet the residential loan requirement for the taxable year ending March 31, 1998. Under prior law, if the Bank failed to satisfy the qualifying thrift definitional tests in any taxable year, it would be unable to make additions to its bad debt reserve. Instead, the Bank would be required to deduct bad debts 23 as they occur and would additionally be required to recapture its bad debt reserve deductions ratably over a multi-year period. At March 31, 1997, the Bank's total bad debt reserve for tax purposes was approximately $13,650,000. Among other things, the qualifying thrift definitional tests required the Bank to hold at least 60 percent of its assets as "qualifying assets." Qualifying assets generally include cash, obligations of the United States or any agency or instrumentality thereof, certain obligations of a state or political subdivision thereof, loans secured by interests in improved residential real property or by savings accounts, student loans and property used by the Bank in the conduct of its banking business. Under current law, a savings association will not be required to recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying thrift definitional tests. Distributions. To the extent that the Bank makes "nondividend distributions" to the Corporation that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Bank's bad debt reserve. Thus, any dividends to the Corporation that would reduce amounts appropriated to the Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Bank. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, after the Conversion, the Bank makes a "nondividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). See "Regulation" and "Dividend Policy" for limits on the payments of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on the Corporation, including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. Dividends-Received Deduction and Other Matters. The Corporation may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Corporation and the Bank will not file a consolidated tax return, except that if the Corporation or the Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. 24 Audits. The Bank has not been audited by the IRS during the past five years. Washington Taxation - ------------------- The Bank is subject to a business and occupation tax which is imposed under Washington law at the rate of 1.60% of gross receipts; however, interest received on loans secured by mortgages or deeds of trust on residential properties is not subject to such tax. The Bank's business and occupation tax returns were audited in November 1995. Item 2. Properties - ------------------- The following table sets forth the location of the Bank's offices, as well as certain information relating to these offices. Net Book Year Value as of Square Leased/ Opened March 31, 1997 Feet Owned ------ -------------- ---- ------ Bellingham Main Office. . . 1971 $1,062,558 19,179 Owned 1500 Cornwall Avenue Bellingham, WA 98225 Bellingham/Meridian . . . . 1987 782,808 4,650 Owned 4110 Meridian Bellingham, WA 98226 Ferndale Office . . . . . . 1976 391,349 3,692 Owned Third and Main Ferndale, WA 98248 Lynden Office . . . . . . . 1981 457,796 3,702 Owned Third and Grover Lynden, WA 98264 Blaine Office . . . . . . . 1976 587,631 3,610 Owned Fourth & "H" Streets Blaine, WA 98230 Mount Vernon Office . . . . 1976 240,040 3,275 Owned 1503 Riverside Dr. Mount Vernon, WA 98273 Anacortes Office. . . . . . 1987 893,906 3,650 Owned 1218 Commercial Avenue Anacortes, WA 98221 Snohomish Office. . . . . . 1987 193,768 1,388 Owned 620 2nd Street Snohomish, WA 98290 Everett Office. . . . . . . 1991 49,390 1,972 Leased 909 S.E. Everett Mall Way #E-500 Everett, WA 98208 (table continued on following page) 25 Net Book Year Value as of Square Leased/ Opened March 31, 1997 Feet Owned ------ -------------- ---- ------ Burlington Office . . . . . 1994 1,283,591 3,980 Owned 1020 S. Burlington Blvd Burlington, WA 98232 Edmonds Office. . . . . . . 1994 $ 74,150 1,597 Leased 315 Fifth Avenue South Suite A&B Edmonds, WA 98020 Mill Creek Office . . . . . 1995 113,696 1,945 Leased 13416 Bothell Everett Hwy. . . . . Suite 201 Mill Creek, WA 98012 At March 31, 1997, the aggregate book value of the Corporation's premises and equipment was $6,130,683. Item 3. Legal Proceedings - -------------------------- The Bank is not engaged in any legal proceedings of a material nature at the present time. From time to time it is a party to legal proceedings wherein it enforces its security interest in loans made by it. Item 4. Submission of Matters to a Vote of Security-Holders - -------------------------------------------------------------- Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ---------------------------------------------------------- The Corporation's common stock is traded on the Nasdaq Stock Market under the symbol "HRZB." The common stock began trading on the Nasdaq Stock Market at the time of the Bank's conversion to stock form in August 1986. The following table presents the high and low closing bid prices from the Nasdaq Stock Market, and cash dividends per share paid, for the last two fiscal years. These prices represent quotations by dealers and do not necessarily represent actual transactions, and do not include retail markups, markdowns or commissions. The Corporation has approximately 5,000 beneficial stockholders at March 31, 1997. 1997 Fiscal Year Quarter HIGH LOW DIVIDENDS PER SHARE ------- ---- --- ------------------- 4th $16.75 $13.25 $.10 3rd 14.00 12.25 .45 2nd 14.00 12.50 .10 1st 13.25 11.75 .10 26 1996 Fiscal Year Quarter HIGH LOW DIVIDENDS PER SHARE ------- ---- --- ------------------- 4th $14.00 $11.75 $.08 3rd 13.75 12.25 .08 2nd 13.25 11.50 .08 1st 12.00 11.25 .08 Item 6. Selected Financial Data - -------------------------------- The information contained in "Item 1 - Business - Selected Financial Data" in this Form 10-K is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ---------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Proxy Statement. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The financial statements contained in the Proxy Statement which are listed under Item 14 herein, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - --------------------------------------------------------- Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the section captioned "Proposal I -- Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" in the Registrant's Proxy Statement. The executive officers of the Corporation and the Bank are as follows: Name Age Position - ----- --- -------- George W. Gust 67 Chairman of the Board of the Corporation and the Bank V. Lawrence Evans 50 Chief Executive Officer and President of the Corporation and the Bank Richard P. Jacobson 34 Vice President and Secretary of the Corporation and the Bank Judy E. Boxx 55 Vice President of the Bank Jeffrey H. Jansen 39 Vice President of the Bank Karen A. LePage 56 Vice President of the Corporation and the Bank (table continued on following page) 27 Name Age Position - ----- --- -------- Karla C. Lewis 50 Vice President of the Bank Merwyn G. Murk 58 Vice President of the Bank Donald A. Wolf 48 Vice President of the Bank The following is a description of the principal occupation and employment of the executive officers of the Corporation and the Bank during at least the past five years: GEORGE W. GUST joined the Bank in 1975 and has also served as the Chairman of the Board of Directors of the Bank since August 1984. Effective May 14, 1990, Mr. Gust resigned as President. V. LAWRENCE EVANS joined the Bank in 1972 and served as the Bank's Executive Vice President/Finance from 1983 to May 14, 1990 at which time, Mr. Evans was appointed President of the Bank. On March 26, 1991, Mr. Evans was appointed Chief Executive Officer of the Bank. RICHARD P. JACOBSON worked for Horizon Bank from 1985 to 1992. From April 1992 to May 1994, he worked as a real estate appraiser for a local appraisal company. He re-joined the Bank in May of 1994 and was appointed Vice President/Finance and Corporate Secretary in December 1994. JUDY E. BOXX joined Horizon Bank in 1984. She has worked in the Loan Servicing/Collection Department since 1986. She was appointed Vice President and manager of the Loan Servicing Department in December of 1994. JEFFREY H. JANSEN joined Horizon Bank in 1985 as the manager of the Bank's Lynden Office. He was appointed Vice President in December of 1994. KAREN A. LEPAGE has been employed by the Bank since 1958. In December 1985, she was promoted to Vice President. She has been manager of the Accounting Department since 1977. KARLA C. LEWIS joined Horizon Bank in 1973. From 1983 to December 1994, she was the Manager of the Loan Servicing Department. She was appointed Vice President in June 1987 and is currently the Bank's Chief Lending Officer. MERWYN G. MURK joined the Bank in 1969 and has been manager of the Savings Department since 1972. He was appointed Vice President in October 1977. DONALD A. WOLF joined Horizon Bank in 1973. He has been the Bank's Operations manager since October 1984. Mr. Wolf was appointed Vice President in June 1987. Item 11. Executive Compensation - -------------------------------- Information regarding management compensation and transactions with management and others is incorporated by reference to the section captioned "Proposal I - Election of Directors" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management - ---------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" of the Proxy Statement. 28 (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" of the Proxy Statement. (c) Changes in Control The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Corporation. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information contained under the sections captioned "Voting Securities and Principal Holders Thereof" in the Proxy Statement is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ----------------------------------------------------------------- (a) (1) Financial Statements -------------------- Independent Auditor's Report* Consolidated Statement of Financial Position, March 31, 1997 and 1996* Consolidated Statement of Income for the years ended March 31, 1997, 1996 and 1995* Consolidated Statement of Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995* Consolidated Statement of Cash Flows for the years ended March 31, 1997, 1996 and 1995* Notes to Consolidated Financial Statements* __________________ * Contained in the Corporation's Annual Meeting Proxy Statement filed with the Securities and Exchange Commission on June 20, 1997 and incorporated herein by reference. All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Meeting Proxy Statement. (2) All required financial statement schedules are included in the Notes to Consolidated Financial Statements. (b) The Corporation did not file any Current Reports on Form 8-K during the quarter ended March 31, 1997. 29 (c) Exhibits -------- (3.1) Articles of Incorporation of Horizon Financial, Corp. (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated October 13, 1995) (3.2) Bylaws of Horizon Financial Corp. (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K dated October 13, 1995) (10.1) Amended and Restated Employment Agreement with V. Lawrence Evans (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1996) (10.2) Deferred Compensation Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1996) (10.3) 1986 Stock Option and Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 (File No. 33-99780)) (10.4) 1995 Stock Option Plan (incorporated by reference to Exhibit 99.2 to the Registrant's Registration Statement on Form S-8 (File No. 33-99780)) (21) Subsidiaries of the Registrant (23) Consent of Auditors (27) Financial Data Schedule 30 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HORIZON FINANCIAL CORP. Date: June 27, 1997 By: /s/ George W. Gust -------------------------- George W. Gust, Chairman of the Board (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ V. Lawrence Evans By: /s/ Fred R. Miller -------------------------- ----------------------- V. Lawrence Evans Fred R. Miller Director Director Principal Financial Officer, Chief Executive Officer and President Date: June 27, 1997 Date: June 27, 1997 By: /s/Karen A. LePage By: /s/ L. M. Strengholt -------------------------- ----------------------- Karen A. LePage L. M. Strengholt Principal Accounting Director Officer Date: June 27, 1997 Date: June 27, 1997 By: /s/ Robert C. Diehl By: /s/ Frank G. Uhrig -------------------------- ----------------------- Robert C. Diehl Frank G. Uhrig Director Director Date: June 27, 1997 Date: June 27, 1997 By: /s/ George W. Gust By: /s/ Maurice D. Fox -------------------------- ----------------------- George W. Gust Maurice D. Fox Director and Chairman of Director the Board Date: June 27, 1997 Date: June 27, 1997 By: /s/ Richard D. Haggen -------------------------- Richard D. Haggen Director Date: June 27, 1997 Exhibit 21 Subsidiaries of the Registrant Parent - ------ Horizon Financial Corp. Jurisdiction Percentage or State of Subsidiaries (a) of Ownership Incorporation - ---------------- ------------ ------------- Horizon Bank, a savings bank 100% Washington Westward Financial Services, Inc. (b) 100% Washington - ---------- (a) The operation of the Corporation's wholly owned subsidiaries are included in the Corporation's Consolidated Financial Statements contained in the Annual Meeting Proxy Statement filed with the SEC on June 20, 1997 and incorporated herein by reference. (b) Wholly-owned subsidiary of Horizon Bank, a savings bank. Exhibit 23 Consent of Auditors CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-99780) of Horizon Financial Corp. of our report dated April 22, 1997 appearing in the Annual Meeting Proxy Statement of Horizon Financial Corp., dated June 20, 1997, which is incorporated by reference in Horizon Financial Corp.'s Annual Report on Form 10-K for the year ended March 31, 1997. /s/MOSS ADAMS LLP MOSS ADAMS LLP Bellingham, Washington June 25, 1997 Exhibit 27 Financial Data Schedule PAGE EX-27 2
9 YEAR MAR-31-1997 MAR-31-1997 4416862 10398316 0 0 61467982 28072373 27853038 399078123 3406150 515341339 424811286 0 12021039 0 0 0 6650340 71858674 515341339 33812005 4898634 0 38710639 20832300 20832300 17878339 200400 268915 7460889 11800113 7803420 0 0 7803420 1.20 1.20 8.05 0 38918 0 0 3236150 0 0 3406150 839750 0 2566400
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