-----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, Ry+B84TM1NB9ZunlHm3w3LwSvavg6tJVxE4qo7kvD3LgVFWsOhHaUuF83wbO07b7 m/aYEgHMN3Thi5nd8VMCcw== 0000939057-99-000067.txt : 19990629 0000939057-99-000067.hdr.sgml : 19990629 ACCESSION NUMBER: 0000939057-99-000067 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990628 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: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27062 FILM NUMBER: 99653397 BUSINESS ADDRESS: STREET 1: 1500 CORNWALL AVE 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, 1999 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 7, 1999, was $99,722,746 (7,526,245 shares at $13.25 per share). It is assumed for purposes of this calculation that none of the registrant's officers, directors and 5% stockholders are affiliates. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Annual Report to Stockholders for the Fiscal Year Ended March 31, 1999 (Parts I and III). 2. Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders. (Part III). PART I ITEM 1. BUSINESS - ----------------- (a) General ------- Horizon Financial Corp. ("Horizon Financial" or the "Corporation") was formed under Washington law on May 22, 1995, and became the holding company for Horizon Bank, a savings bank ("Horizon Bank" or the "Bank"), effective October 13, 1995. 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. 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. The Bank's operations are conducted through 12 full-service office facilities, located in Whatcom, Skagit and Snohomish counties in Northwest Washington. The Bank is currently building 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 office (approximately 15,000 square feet) will serve as an operation center to support additional growth for the Corporation. Completion of construction is scheduled for the fourth quarter of 1999. The Bank is also currently working on plans to build an office at Murphy's Corner near Mill Creek, which will replace the Bank's current leased location in that area. During the fiscal year ended March 31, 1999, the Bank relocated its Edmonds office by purchasing the Dayton Place building at the corner of 5th and Dayton in downtown Edmonds. The Bank's management continues to research sites for future development, with emphasis on locations in the growing Snohomish County markets. At its March 19, 1998 meeting, the Board of Directors authorized the repurchase of up to 10% (approximately 747,000 shares) of the Corporation's outstanding common stock over a 24 month period. During the fiscal year ended March 31, 1999, the Corporation repurchased 13,900 shares of its common stock, compared to no repurchases during the prior year. This repurchase 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. As of December 11, 1998, the Bank became a member of the Federal Home Loan Bank of Seattle. One of the significant benefits of membership include the ability to supplement the Bank's balance sheet with wholesale funds in order to meet cyclical funding needs and to assist management in its interest rate risk management efforts. Acquisition - ----------- On June 19, 1999 the Company completed the acquisition of Bellingham Bancorporation ("Bancorporation") 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 Company exchanged 2.74 shares of its common stock for each Bancorporation share. In this regard, Horizon issued approximately 1,129,264 shares of its common stock in the transaction. The acquisition was accounted for as a pooling of interests. 2 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, ---------------------------------------------- 1999 1998 1997 1996 1995 ------ ---- ---- ---- ---- (In thousands) Total Assets . . . . . . $602,126 $547,146 $515,341 $488,968 $457,478 Loans Outstanding. . . . 484,545 433,697 399,078 389,651 360,120 Cash and Investment Securities . . . . . . 101,285 101,499 104,356 87,662 83,782 Deposits . . . . . . . . 481,119 450,125 424,811 402,676 377,703 Borrowings . . . . . . . 19,800 -- -- -- -- Stockholders' Equity . . 89,750 83,895 78,509 79,147 72,685 Number of Full Service Offices. . . . . . . . 12 12 12 12 11 Interest Income. . . . . 43,203 40,901 38,710 37,082 33,989 Interest Expense . . . . (23,276) (22,235) (20,832) (20,773) (16,948) Net Interest Income. . . 19,927 18,666 17,878 16,309 17,041 Other Income . . . . . . 1,964 1,691 1,583 1,293 1,220 Non-interest Expense . . (8,407) (7,565) (7,461) (6,685) (7,149) Provision for Loan Losses. (395) (355) (200) (110) (132) --------- -------- ------- -------- ------- Income (Loss) Before Taxes . . 13,089 12,437 11,800 10,807 10,980 Federal Income Tax . . . 4,456 4,215 3,997 3,586 3,640 Gain on Sale of Trust Department. . . . -- -- -- -- 181 --------- -------- ------- -------- -------- Net Income . . . . . . . $ 8,633 $ 8,222 $ 7,803 $ 7,221 $ 7,521 ========= ======== ======= ======== ======== 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, --------------------------- 1999 1998 1997 ---- ---- ---- Return on average assets (net income divided by average total assets). . . . . 1.50% 1.55% 1.55% Return on average equity (net income divided by average equity). . . . . . . . 9.94 10.13 9.90 Dividend payout ratio (dividends declared per share divided by net income per share) 38.26 74.77 62.50 Equity to assets ratio (average equity divided by average total assets). . . . . 15.11 15.29 15.70 Interest rate spread (difference between average yield on interest-earning assets and average cost of interest bearing liabilities) 2.99 2.94 2.98 Net yield on earning assets (net interest income as a percentage of average interest earning assets) . . . . . . . . . . . . . 3.66 3.68 3.72 3 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." 4 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, --------------- -------------------------------------------------------------------------- 1999 1999 1998 1997 --------------- ------------------------ ----------------------- ------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Average Yield/ Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost ------- ---- ------- -------- ----- ------- -------- ----- ------- -------- ----- Interest- earning assets: Loans receivable. . .$484,545 8.26% $453,487 $37,450 8.26% $416,557 $35,008 8.40% $403,056 $33,812 8.39% Investment securities. . . 29,667 6.03 33,211 2,002 6.03 43,811 2,803 6.40 46,850 2,937 6.27 Mortgage- backed securi- ties . . . . . 54,429 6.50 57,721 3,751 6.50 47,158 3,090 6.55 30,834 1,962 6.36 ------- ---- ------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest- earning assets 568,641 7.94 544,419 43,203 7.94 507,526 40,901 8.06 480,740 38,711 8.05 Interest- bearing liabilities: Deposits . . . 481,119 4.94 461,915 22,776 4.94 439,381 22,235 5.12 410,267 20,832 5.07 Borrowings . . 19,800 5.39 10,050 500 5.39 -- -- - - - -- ------- ---- ------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest- bearing liabilities. . 500,919 4.95 471,965 23,276 4.95 439,381 22,235 5.12 410,267 20,832 5.07 ------- ---- ------- ------ ---- ------- ------ ---- ------- ------ ---- Net interest income. . . . . $19,927 $18,666 $17,879 ======= ======= ======= Interest rate spread. . . . . 2.99% 2.94% 2.98% ---- ---- ---- Net yield on interest- earning assets. . . . . 3.66% 3.68% 3.72% ---- ---- ---- Ratio of average interest- earning assets to average interest- bearing liabilities . . 113.76% 115.51% 117.18% ====== ====== ====== 5
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, --------------------------------------------------------------------------------- 1999 vs. 1998 1998 vs. 1997 1997 vs. 1996 ------------------------- ------------------------ --------------------------- 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 ------ ---- ------ ----- ------ ---- ------ ----- ------ ---- ------ ----- Interest income: Interest and fees on loans. . . . . . . $3,070 $(577) $(51) 2,442 $1,154 $ 41 $ 1 $1,196 $2,388 $(671) $(50)$1,667 Investment securities and other interest- bearing securities . . (2) (138) 1 (139) 839 132 23 994 71 (671) (1) (38) ------ ---- ---- ------ ----- ---- ----- ------ ------ ----- ----- ---- Total interest- earning assets $3,068 $(715) $(50) $2,303 $1,993 $173 $ 24 $2,190 $2,459 $(779) $(51)$1,629 ====== ===== ===== ====== ====== ==== ===== ====== ===== ====== ==== ====== Interest expense: Deposit accounts. . . . 1,378 (789) (48) $ 541 $1,183 $208 $ 12 $1,403 $ 835 $(731) $(45)$ 59 Borrowings. . . . . . . -- -- 500 500 - - -- -- -- -- - -- ------ ---- --- ------ ----- ---- ----- ------ ------ ----- ----- ----- Total interest-bearing liabilities. . . . . . $1,378 $(789) $452 $1,041 $1,183 $208 $ 12 $1,403 $ 835 $(731) $(45)$ 59 ====== ====== ==== ====== ====== ==== ===== ====== ====== ====== ===== ===== 6
Lending Activities - ------------------ GENERAL. The Bank's loan portfolio totaled $484,544,820 at March 31, 1999, representing approximately 80.47% of its total assets. On that date, 77.66% of total outstanding loans consisted of loans secured by mortgages on single family residential properties, 4.15% of the loans consisted of loans secured by two-to-four unit residential properties, 4.41% of total outstanding loans consisted of loans secured by mortgages on over four unit residential properties, and 10.10% 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 Snohomish 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, 1999, $218,707,915 (or 45.14%) of the Bank's net mortgage loans receivable were comprised of loans that were other than long-term fixed-rate mortgage loans (i.e., loans with maturities greater than 15 years, which historically have been the industry's traditional area of lending activity). 7 LOAN MATURITY. The following table sets forth certain information at March 31, 1999 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 are net of undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses. Due After 1 Due After 3 Due After 5 Due During Through 3 Through 5 Through 15 Due Over 15 the Year Ended Years After Years After Years After Years After March 31, March 31, March 31, March 31, March 31, 2000 1999 1999 1999 1999 Total -------------- ----------- ----------- ----------- --------- ------ (In thousands) Commercial, financial and agricultural . . . . . . . $1,805 $28,637 $10,051 $ 29,163 $ 37,857 $107,513 Real estate construction . . -- -- -- -- 22,763 22,763 Real estate-mortgage, installment and other . . . 3,204 5,138 9,695 138,257 197,975 354,269 ------ ------- ------- -------- -------- -------- Total . . . . . . . . . $5,009 $33,775 $19,746 $167,420 $258,595 $484,545 ====== ======= ======= ======== ======== ========
The following table sets forth the dollar amount of all loans due one year after March 31, 1999 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. . . . . . . . . $1,805 $ -- $1,805 Real estate construction . . . -- -- -- Real estate-mortgage, installment and other . . . . . . . . . . 3,204 -- 3,204 ------ ---- ------ Total . . . . . . . . . . $5,009 $ -- $5,009 ====== ==== ====== 8
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, 1999, approximately 81.81% 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 97% 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 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, 1999, adjustable mortgage loans totalled $196,000 or .08% of total originations as compared to $140,000 or .09% of total originations for the year ended March 31, 1998. 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. At March 31, 1999, the Bank had $22,763,297, or 4.70% of total loans outstanding in construction loans, as compared to $24,883,763 or 5.74% of total loans at March 31, 1998. At March 31, 1999, $4,730,020, or 20.78% 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 $70,525,228 or approximately 14.55% of Horizon Bank's loan portfolio at March 31, 1999. These loans include fixed rate and adjustable rate mortgages secured by apartment buildings (i.e., those containing five or more living units) and business and commercial properties. The Bank generally requires that such loans have a debt service coverage of 1.20 to 1 with a loan-to-value ratio not exceeding 80%. Fixed-rate loans generally have a five to 15-year loan term, with payments based upon a 15 to 30-year amortization schedule. At March 31, 1999, $6,604,572 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 9 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, 1999, the Bank held $14,746,801 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 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 substantially centralized in the main office of the Bank. 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, the application is forwarded to the Bank's Loan 10 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 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% 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. Currently, the Bank emphasizes the origination of 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 loans and 10, 15 and 20 year fixed-rate loans for its own portfolio. In addition to originating loans, Horizon Bank may purchase 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 Fannie Mae. 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, 1999, the Bank was servicing loans for others aggregating approximately $163,526,986. 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. LOAN COMMITMENTS. Horizon Bank issues commitments to originate conventional mortgage loans on existing residential dwellings are made for periods up to 45 days from the date of loan application and are based upon the prevailing market rate at the time of application. At March 31, 1999, such commitments amounted to $16,237,726. 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 2.5% on conventional residential mortgages and 1.0% to 2.0% for commercial real estate loans. The total amount of deferred loan origination fees and unearned discounts at March 31, 1999 was $7,147,664. 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 experiences an increase in loan fee income during periods of 11 low interest rates due to the resulting 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 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 1999, the Bank modified $17,148,381 of real estate loans, compared to $4,515,129 in fiscal 1998. 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 the Bank generally is able to work out a satisfactory repayment schedule with a delinquent borrower, the Bank 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, 1999, the Bank had three loans over 90 days delinquent with a net balance of $332,624. Management does not anticipate incurring material losses from these loans. Delinquent loans have been consistently low over the last three fiscal years due to a strong local economy and strong underwriting. No assurances, however, can be given as to future delinquency levels and the continued strength of the local economy. The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated. At March 31, --------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Non-accrual loans. . . $ -- $ -- $ -- $ -- $ -- Loans 90 days or more delinquent and accruing interest. . . . . . . 332,624 25,345 38,918 -- 1,545 Restructured loans . . -- -- -- -- -- Real estate acquired through foreclosure . -- -- -- -- -- -------- ------- ------- ----- ------ Total. . . . . . . . $332,624 $25,345 $38,918 $ -- $1,545 ======== ======= ======= ===== ====== As a percentage of net loans . . . . . . . . .07% .006% .010% -- .0004% As a percentage of total assets. . . . . . . . .06% .005 .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. 12 The Bank established an allowance for losses for the year ended March 31, 1999 in the amount of $3,956,150 and $3,611,150 for the year ended March 31, 1998. The Bank's loan loss reserve as of March 31, 1999, is approximately .82% 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, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Balance at beginning of period. . . $3,611,150 $3,406,150 $3,236,150 $3,126,150 $2,994,150 Provision for loan losses . . 395,000 355,000 200,400 110,000 132,000 Adjustment to reserves. . . . (50,000) (150,000) (30,400) -- -- ---------- ---------- ---------- ---------- ---------- Balance at end of period . . . $3,956,150 $3,611,150 $3,406,150 $3,236,150 $3,126,150 ========== ========== ========== ========== ========== The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. Year Ended March 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Commercial, financial and agricultural. . . $ 950,000 $ 850,000 $ 800,000 $ 800,000 $ 858,000 Real estate - mortgage. . 3,006,150 2,761,150 2,606,150 2,436,150 2,268,150 ---------- ---------- ---------- ---------- ---------- Total allowance for loan losses. . $3,956,150 $3,611,150 $3,406,150 $3,236,150 $3,126,150 ========== ========== ========== ========== ========== The Bank had no allowances for real estate acquired through foreclosure at March 31, 1999, 1998, 1997, 1996 and 1995. 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 amortized cost of the above investments at March 31, 1999 was $21,614,380 compared to a market value of $26,081,374. 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, 1999, such securities had an amortized cost of $54,429,126 and a market value of $55,095,846. 13 The following table presents the amortized cost of the Bank's investment securities portfolio and short-term investments. The market value of the Bank's investment securities portfolio at March 31, 1999 was approximately $81,177,220. This does not include interest-bearing deposits and cash equivalents. At March 31, -------------------------------- 1999 1998 1997 ---- ---- ---- (In thousands) Investment securities: U.S. Government: Available for sale . . . $10,814 $20,258 $21,944 Held to maturity . . . . 494 1,485 4,970 ------- ------- ------- 11,308 21,745 26,914 Asset-backed securities(1): Available for sale . . . 43,470 33,100 36,512 Held to maturity . . . . 10,959 15,489 19,691 ------- ------- ------ 54,429 48,589 56,203 Other securities(2): Available for sale . . . 9,807 9,056 2,065 Held to maturity . . . . 500 500 3,412 ------- ------- ------- 10,307 9,556 5,477 ------- ------- ------- Total investments . . . 76,044 79,890 88,594 Interest bearing deposits and cash equivalents . . . . 15,833 16,859 14,815 ------- ------- ------- $91,877 $96,749 $103,409 ======= ======= ======== - ---------------- (1) Consists of mortgage-backed securities and CMO's. (2) Consists of corporate debt securities and marketable equity securities. 14 The following table sets forth the scheduled maturities, amortized cost, market values and average yields for the Bank's investment securities at March 31, 1999. At March 31, 1999 ------------------------------------------------------------------------------------ One Year One to Five Five to Ten More than or Less Years Years Ten Years Total Investment Securities ---------- ------------ ----------- ---------- --------------------------- Amor- Aver- Amor- Aver- Amor- Aver- Amor- Aver- Amor- Mar- Aver- tized age tized age tized age tized age tized ket rage Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield ----- ----- ----- ----- ----- ----- ----- ----- ----- ------ ------ (Dollars in thousands) C> U.S. Government, agency securities, state and political subdivisions: Available for sale . . . . . . $ 6,446 5.81% $ 4,218 6.10% $ 150 7.00%$ -- --% $10,814 $10,877 5.94% Held to maturity. 494 5.70 -- -- -- -- -- -- 494 494 5.70 ------ ---- ------- ----- -- -- ----- --- -- --- ------ ------ ---- 6,940 5.80 4,218 6.10 150 7.00 -- -- 11,308 11,371 5.93 Mortgage-backed securities: Available for sale . . . . . . 903 4.52 4,382 5.72 1,709 6.74 36,475 6.44 43,469 43,887 6.34 Held to maturity. -- -- 881 6.52 7,543 6.38 2,536 7.72 10,960 11,209 6.70 ------ ---- ------- ---- ----- ---- ------- ---- ------ ------ ---- 903 4.52 5,263 5.85 9,252 6.44 39,011 6.52 54,429 55,096 6.41 Other: Available for sale . . . . . . 8,907 6.33 900 6.75 -- -- -- -- 9,807 14,171 6.37 Held to maturity. -- 500 11.53 -- -- -- -- 500 540 11.53 ------- ---- ------- ----- ------ ---- ------- ---- ------ ------ ----- 8,907 6.33 1,400 8.46 -- -- -- -- 10,307 14,711 6.62 ------- ---- ------- ----- ------ ---- ------- ---- ------- ------ ----- Total . . . . . . $16,750 6.01 $10,881 6.28 $9,402 6.45% $39,011 6.52%$76,044 $81,178 6.37% ======= ==== ======= ====== ======= ======= ======= 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, 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 30 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, ----------------------------------------------------- 1999 1998 1997 ---------------- ---------------- --------------- Weighted Weighted Weighted Average Average Average Average Average Average Type Balance Rate Balance Rate Balance Rate - ---- ------- -------- ------- -------- ------- ------- (Dollars in thousands) Savings. . . . . $ 32,944 3.09% $ 31,452 3.38% $ 30,164 3.45% Drafts . . . . . 32,447 1.50 27,624 1.67 25,482 1.68 Money Market . . 57,800 3.83 58,256 3.81 52,334 4.15 Time Deposits. . 338,724 5.64 322,049 5.77 302,287 5.72 -------- ----- -------- ----- -------- ----- Total. . . . . $461,915 4.94% $439,381 5.08% $410,267 5.10% ======== ===== ======== ===== ======== ===== The following table indicates the amount of the Bank's deposits by time remaining until maturity as of March 31, 1999 of $100,000 or more. Certificates Maturity Period of Deposit --------------- ------------ Three months or less . . . . $10,180,196 Three through six months . . 17,844,974 Six through twelve months. . 26,201,109 Over twelve months . . . . . 31,801,702 ----------- Total. . . . . . . . . . . $86,027,981 =========== 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 five years called Jumbo Certificates of Deposit; nonnegotiable, nontransferable time deposits with minimum deposits of $500 and terms from 30 days to five years at fixed rates; 12-month to 10-year variable rate fixed term certificates; Individual Retirement Accounts (IRAs); Qualified Retirement Plans; transaction accounts such as regular checking; MMDAs with and without limited check access. The Bank's practice on early withdrawal penalties is applicable only to time deposits. Management believes that in periods of rising interest rates this practice will discourage depositors from making premature withdrawals for the purpose of reinvesting in higher rate time deposits. 16 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 30 days to 10 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 periodically, 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 periodically 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 common stocks and mutual funds) 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 9 of the Notes to the Consolidated Financial Statements. BORROWINGS. In December 1998, the Bank joined the Federal Home Loan Bank of Seattle providing access to a variety of wholesale funding options. Also, the Bank's security portfolio provides additional borrowing capacity in the reverse repurchase markets. At March 31, 1999, the Bank had $19.8 million on borrowings, compared to no borrowings during the previous two fiscal years. Access to these wholesale borrowings allows management to meet cyclical funding needs, and assists in interest rate risk management efforts. Competition - ----------- The Bank faces strong 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 17 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 deregulation of interest rate controls on deposits, the Bank has faced increasing competition for deposits from commercial banks, other thrift institutions and non-regulated financial intermediaries. Personnel - --------- At March 31, 1999, Horizon Bank employed 132 full-time and 13 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. These insurance premiums were substantially reduced by the FDIC effective January 1, 1996 as a result of the BIF having reached its designated reserve ratio in 1995. Insurance premiums for BIF insured institutions currently range from 0 to 27 basis points. As a well capitalized bank, Horizon Bank qualified for the minimum statutory assessment during fiscal 1999. The Bank's assessments for the year ended March 31, 1999, equalled $54,565. 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 SAIF and BIF 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 18 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. FDIC regulations recognize two types or tiers of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1 capital generally includes common stockholders' equity and noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital. The FDIC currently measures an institution's capital using a leverage limit together with certain risk-based ratios. The FDIC's minimum leverage capital requirement specifies a minimum ratio of Tier 1 capital to average total assets. Most banks are required to maintain a minimum leverage ratio of at least 4% to 5% of total assets. The FDIC retains the right to require a particular institution to maintain a higher capital level based on an institution's particular risk profile. The Bank calculated its leverage ratio to be 14.62% as of March 31, 1999. FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed in one of four categories and given a percentage weight -- 0%, 20%, 50% or 100% - -- based on the relative risk of that category. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets must be at least 4%. The Bank has calculated its total risk-based ratio to be 27.50% as of March 31, 1999, and its Tier 1 risk-based capital ratio to be 25.97%. In evaluating the adequacy of a bank's capital, the FDIC may also consider other factors that may affect a bank's financial condition. Such factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management's ability to monitor and control financial operating risks. 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 19 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. FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires (under "Regulation D") that all depository institutions, including savings banks, 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 $4.9 million of net transaction accounts, 3% of the next $41.6 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, 1999, 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 is 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. 20 Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. 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: 21 Amount Percent ------ ------- (Dollars in Thousands) Tier 1 Capital $86,489 14.62% Minimum Tier 1 (leverage) requirement 23,663 4.00 ------- ------- Excess $62,826 10.62% ======= ======= Risk-based capital $91,560 27.50% Minimum risk-based capital requirement 26,640 8.00 ------- ------- Excess $64,920 19.50% ======= ======= 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 12 of the Notes to the Consolidated Financial Statements contained in the 1999 Annual Report to Stockholders ("Annual Report") for additional information concerning the income taxes payable by the Bank. TAX BAD DEBT RESERVES. Historically, savings institutions such as the Bank, which met certain definitional tests primarily related to their assets and the nature of their businesses, were permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions may, within specified formula limits, have been deducted in arriving at the Bank's taxable income. For purposes of computing the deductible addition to its bad debt reserve, the Bank's loans are separated into "qualifying real property loans" (i.e., generally those loans secured by interests in residential real property) and all other loans ("non-qualifying loans"). The following formulas were used to compute the bad debt deduction with respect to qualifying real property loans: (i) actual loss experience or (ii) a percentage equal to 8% of taxable income. The deduction with respect to non-qualifying loans was computed under the experience method. Reasonable additions to the reserve for losses on non- qualifying loans were based upon actual loss experience and would reduce the current year's addition to the reserve for losses on qualifying real property loans, unless that addition was also determined under the experience method. The sum of the additions to each reserve for each year was the Bank's annual bad debt deduction. The provisions repealing the current thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The new rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all financial institutions for tax years beginning after December 31, 1995. These rules also require that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). The Bank has previously recorded a deferred tax liability equal to the bad debt recapture and as such the new rules will have no effect on the net income or federal income tax expense. For taxable years beginning after December 31, 1995, the Bank's bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years or, if the Bank is a "large" association (assets in excess of $500 million) on the basis of net charge-offs during the taxable year. The new rules allow an institution to suspend bad debt reserve recapture for the 1996 and 1997 tax years if the institution's lending activity for those years is equal to or greater than the institution's average mortgage lending activity for the six taxable years preceding 1996 adjusted for inflation. For this purpose, only home purchase or home improvement loans are included and the institution can elect to have the tax years with the highest and lowest lending activity removed from the average calculation. If an institution 22 is permitted to postpone the reserve recapture, it must begin its six year recapture no later than the 1998 tax year. The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders. Horizon Bank met the residential loan requirement for the taxable year ending March 31, 1999. DISTRIBUTIONS. If a stock institution distributes amounts to stockholders and the distribution is treated as being from its accumulated bad debt reserves, the distribution will cause the institution to have additional taxable income. A distribution to stockholder is deemed to have been made from accumulated bad debt reserves to the extent that (i) the reserves exceed the amount that would have been accumulated on the basis of actual loss experience, and (ii) the distribution is a "non-dividend distribution." A distribution in respect of stock is a non-dividend distribution to the extent that, for federal income tax purposes, (i) it is redemption of shares, (ii) it is pursuant to a liquidation or partial liquidation of the institution, or (iii) in the case of current distribution, together with all other such distributions during the taxable year, it exceeds the institution's current and post-1951 accumulated earnings and profits. The amount of additional taxable income created by a non-dividend distribution is an amount that, when reduced by tax attributable to it, is equal to the amount of the distribution. MINIMUM TAX. In addition to regular corporate income tax, corporations are subject to an alternative minimum tax which generally is equal to 20% of alternative minimum taxable income (taxable income, increased by tax preference items and adjusted for certain regular tax items). The preference items which are generally applicable include an amount equal to 75% of the amount by which a financial institution's adjusted current earnings (generally alternative minimum taxable income computed without regard to this preference and prior to reduction for net operating losses) exceeds its alternative minimum taxable income without regard to this preference and the excess of the institution's bad debt deduction over the amount deductible under the experience method, as discussed below. Alternative minimum tax paid can be credited against regular tax due in later years. 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 1.50% 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. 23 Net Book Year Value as of Square Leased/ Opened March 31, 1999 Feet Owned ------ -------------- ------ ------- Bellingham Main Office . 1971 $1,505,863 19,179 Owned 1500 Cornwall Avenue Bellingham, WA 98225 Bellingham/Meridian. . . 1987 818,999 4,650 Owned 4110 Meridian Bellingham, WA 98226 Ferndale Office. . . . . 1976 431,572 3,692 Owned Third and Main Ferndale, WA 98248 Lynden Office. . . . . . 1981 495,471 3,702 Owned Third and Grover Lynden, WA 98264 Blaine Office. . . . . . 1976 606,283 3,610 Owned Fourth & "H" Streets Blaine, WA 98230 Mount Vernon Office. . . 1976 322,636 3,275 Owned 1503 Riverside Dr. Mount Vernon, WA 98273 Anacortes Office . . . . 1987 883,528 3,650 Owned 1218 Commercial Avenue Anacortes, WA 98221 Snohomish Office . . . . 1987 223,011 1,388 Owned 620 2nd Street Snohomish, WA 98290 Everett Office . . . . . 1991 58,922 1,972 Leased 909 S.E. Everett Mall Way #E-500 Everett, WA 98208 Burlington Office. . . . 1994 1,226,808 3,980 Owned 1020 S. Burlington Blvd Burlington, WA 98232 Edmonds Office . . . . . 1994 2,305,678 15,265 Owned 130 Fifth Avenue South Edmonds, WA 98020 Mill Creek Office. . . . 1995 99,364 1,945 Leased 13416 Bothell Everett Hwy. Suite 201 Mill Creek, WA 98012 Barkley* . . . . . . . . 1999 902,227* -- Owned Marysville . . . . . . . 25,000* Under contract - ---------- *Reflects earnest money deposit, plus construction fees paid to date. At March 31, 1999, the aggregate book value of the Corporation's premises and equipment was $9,905,362. 24 ITEM 3. LEGAL PROCEEDINGS - -------------------------- Neither the Corporation nor the Bank is 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 information contained in the section "Corporate Information -- Stock Prices and Dividend Information" in the Annual Report is incorporated herein by reference. 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, along with the Corporation's Year 2000 discussion, is incorporated herein by reference to the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- 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 -- Quantitative and Qualitative Disclosures About Market Risk" in the Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The financial statements contained in the Annual Report 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 is incorporated herein by reference. 25 The executive officers of the Corporation and the Bank are as follows: Name Age Position - ---- ----- -------- George W. Gust 69 Chairman of the Board of the Corporation V. Lawrence Evans 52 Chief Executive Officer and President of the Corporation; and Chairman of the Board, Chief Executive Officer and President of the Bank Richard P. Jacobson 36 Vice President and Secretary of the Corporation and Senior Vice President and Secretary of the Bank Judy E. Boxx 57 Vice President of the Bank Jeffrey H. Jansen 41 Vice President of the Bank Karen A. LePage 58 Vice President of the Corporation and the Bank Karla C. Lewis 52 Senior Vice President of the Bank Merwyn G. Murk 60 Vice President of the Bank Donald A. Wolf 50 Vice President of the Bank Kelli J. Holz 30 Vice President of the Corporation and the Bank Sandra R. Mathewson 39 Vice President of the Bank Elizabeth E. Sherry 47 Vice President of the Bank Carla J. Williams 53 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 served as the Chairman of the Board of Directors of the Corporation since its formation in 1995. Mr. Gust also served as Chairman of the Bank from August 1984 until July 1997. 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 and in July 1997, Mr. Evans was appointed Chairman of the Board of the Bank. RICHARD P. JACOBSON has worked for the Bank for 12 years and was appointed Vice President/Finance and Corporate Secretary in December 1994. In March 1998, Mr. Jacobson was appointed Senior Vice President of the Bank. 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. 26 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. In March 1998, she was appointed Senior Vice President of the Bank. 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. KELLI J. HOLZ, CPA, joined the Bank in 1988. From 1991 to 1998 she was the Manager of the Internal Audit Department. In March 1998, she was appointed Vice President and is currently acting as Controller of the Bank. SANDRA R. MATHEWSON joined the Bank in 1986. She was appointed Vice President in March 1998 and is currently the Sales and Service Manager for the Bank. ELIZABETH (BETH) E. SHERRY joined the Bank in 1996. She was appointed Vice President in December 1997 and is currently the Bank's New Accounts Manager. CARLA J. WILLIAMS joined the Bank in 1988. She was appointed Vice President in March 1998 and is currently the Bank's Loan Production Manager. 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" in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" in 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. 27 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, 1999 and 1998* Consolidated Statement of Income for the years ended March 31, 1999, 1998 and 1997* Consolidated Statement of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997* Consolidated Statement of Cash Flows for the years ended March 31, 1999 1998 and 1997* Notes to Consolidated Financial Statements* ------------------- * Contained in the Annual Report filed as Exhibit 13 hereto and incorporated herein by reference. (2) All required financial statement schedules are included in the Notes to Consolidated Financial Statements. (b) A Current Report on Form 8-K was filed on January 22, 1998 to report that Horizon Financial Corp. and Horizon Bank had entered into an Agreement and Plan of Mergers with Bellingham Bancorp and Bank of Bellingham. The acquisition was effective as of June 19, 1999. (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)) (13) Annual Report to Stockholders (21) Subsidiaries of the Registrant (23) Consent of Auditors (27) Financial Data Schedule 28 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 22, 1999 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/George W. Gust By: --------------------------- ------------------------------ George W. Gust Robert C. Diehl Director and Chairman of Director the Board Date: June 22, 1999 Date: June __, 1999 By: /s/V. Lawrence Evans By: /s/Fred R. Miller --------------------------- ------------------------------ V. Lawrence Evans Fred R. Miller Chief Executive Officer Director and President Date: June 22, 1999 Date: June 22, 1999 By: /s/ Richard P. Jacobson By: /s/ L.M. Strengholt --------------------------- ------------------------------- Richard P. Jacobson L. M. Strengholt Principal Financial Officer Director Date: June 22, 1999 Date: June 22, 1999 By: /s/Kelli J. Holz By: /s/Frank G. Uhrig --------------------------- ------------------------------- Kelli J. Holz Frank G. Uhrig Principal Accounting Officer Director Date: June 22, 1999 Date: June 22, 1999 By: /s/ Richard D. Haggen By: /s/Gary E. Goodman --------------------------- ------------------------------- Richard D. Haggen Gary E. Goodman Director Director Date: June 22, 1999 Date: June 22, 1999 29 EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS HRZB HORIZON FINANCIAL CORP. FISCAL 1999 ANNUAL REPORT CORPORATE PROFILE ============================================================================== Horizon Financial Corp. is a financial services holding company based in Bellingham, Washington. The Corporation's primary subsidiary, Horizon Bank, operates twelve full-service offices located in Whatcom, Skagit, and Snohomish counties. Originally founded in 1922 as a savings and loan association, Horizon converted to a mutual savings bank in 1979, and then converted to a publicly traded company through an initial public offering in August 1986. The conversion to the holding company structure occurred in October 1995. Since the days of its founding, Horizon has focused on providing exceptional customer service through the delivery of a variety of checking and savings accounts and by originating consumer, residential and commercial real estate loans. In January 1999, Horizon signed a definitive agreement to merge with Bellingham Bancorporation, which operates the Bank of Bellingham, a commercial banking subsidiary. The merger is expected to close on June 18, at which time Horizon will incorporate the best of business and personal banking services in one great community bank. We believe that this combined, full service structure will allow us to generate better returns for stockholders and to better serve our customers and the local community. We invite you to review the enclosed materials and we thank you for your continued support. Corporate Profile ................................................ 1 Financial Highlights ............................................. 2 Letter to Stockholders ........................................... 3 Management's Discussion & Analysis ............................................ 7 Quantitative and Qualitative Disclosure About Market Risk..................................11 - 12 Consolidated Financial Statements Independent Auditor's Report.................................................. 16 Statements of Financial Position................................................ 17 Statements of Income ............................................. 18 Statements of Stockholders' Equity.............................................. 19 Statement of Cash Flows........................................... 20 Notes to Consolidated Financial Statements..........................................21 - 43 Directors & Officers.............................................. 45 Corporate Information ............................................ 46 Office Locations ................................................. 47 ============================================================================= 1 FINANCIAL HIGHLIGHTS ============================================================================== Thousands of dollars except common share data Years Ended March 31 99 98 97 96 95 - ------------------------------------------------------------------------------ Balance sheet data total amount of Assets $602,126 $547,146 $515,341 $488,968 $457,478 Loans outstanding 484,545 433,697 399,078 389,651 360,120 Cash and investment securities 101,285 101,499 104,356 87,662 83,782 Deposits 481,119 450,125 424,811 402,676 377,703 Stockholders' equity 89,750 83,895 78,509 79,147 72,685 - ------------------------------------------------------------------------------ Summary of Operations Interest income $43,203 $40,901 $38,711 $37,082 $33,989 Interest expense (23,276) (22,235) (20,832) (20,773) (16,948) Net interest income 19,927 18,666 17,878 16,309 17,041 Other income 1,964 1,691 1,583 1,293 1,220 Non-interest expense(1) (8,802) (7,920) (7,661) (6,795) (7,281) Income before taxes 13,089 12,437 11,800 10,807 11,255(3) Income taxes (4,456) (4,215) (3,997) (3,586) (3,734)(3) Net income $8,633 $8,222 $7,803 $7,221 $7,521 - ------------------------------------------------------------------------------ Per Common Share(2) Basic earnings $1.15 $1.11 $1.04 $0.96 $1.01 Dividends .44 0.83(5) 0.75(4) 0.32 0.31 Equity 11.95 11.22 10.61 10.46 9.70 Weighted average shares outstanding 7,491,280 7,435,782 7,478,666 7,535,956 7,460,697 - ------------------------------------------------------------------------------ 1 Includes provision for loan losses. 2 Restated for 15% stock dividend declared April 22, 1997; 10% stock dividend declared June 28, 1994. 3 Includes gain on sale of Trust Department. 4 Includes special cash dividend of $0.35 declared November 21, 1996. 5 Includes special cash dividend of $0.40 declared January 28, 1998. Bar graphs appear below table as follows: Assets: Deposits: Loans Receivable: 1995: $457.5 1995: $377.7 1995: $360.1 1996: $489.0 1996: $402.7 1996: $389.7 1997: $515.3 1997: $424.8 1997: $399.1 1998: $547.2 1998: $450.1 1998: $433.7 1999: $602.1 1999: $481.1 1999: $484.5 ============================================================================== 2 LETTER TO STOCKHOLDERS ============================================================================== [Picture of V. Lawrence Evans President and Chief Executive Officer Horizon Financial Corp.] "Our merger with Bellingham Bancorporation accomplishes several things for Horizon: it accelerates our entry into commercial banking; it provides us with an immediate base of commercial customers and products; and it affords us the experience of a commercial banking team whose business philosophy mirrors our commitment to service excellence. This merger is the next logical step in pursuing our goals." To our stockholders and customers, Horizon Financial Corp. is pleased to provide you with this report on your Corporation's performance. In the following pages, you will read about how fiscal 1999 was another successful year: demand for Horizon's products and services reached record levels; we added convenient new ways for our customers and prospects to interact with us; we completed the upgrade of our computer systems to better prepare ourselves for the future; and now, as we prepare to close our merger with Bellingham Bancorporation, Horizon prepares to expand its business in new and exciting ways. Business was strong. For the second year in a row, demand for Horizon's products and services has never been higher. Loan volume grew to a record $258.0 million, up 65 percent from the previous year's record-setting high of $256.0 million. Loan refinance activity accounted for a large part of the increase in volume, as many homeowners took advantage of the low interest rate environment. In Horizon's two primary markets of Whatcom and Skagit County, the Corporation continues to be one of the leaders in market share - we were the second highest lender as determined by loan volume. And Horizon's underwriting quality continues to rank the Corporation as one of the best in the state - as of March 31, 1999, Horizon had only $373,141 in nonperfomring loans, or 0.06 percent of assets. Deposit growth was strong too, increasing $31 million for the year and illustrating Horizon's ability to attract deposits in a highly competitive environment. Customers continue to be attracted to Horizon's "un-big" approach to banking, where service excellence, personal attention and low fees stand in stark contract with Horizon's larger competitors. We are pleased to report that Horizon also made progress on its longer- term goal of using its capital more profitably. By growing its balance sheet with long-term borrowings, Horizon was able to lock in a low-cost source of funds and increase its assets faster than if it had ============================================================================== 3 LETTER TO STOCKHOLDERS ============================================================================== [Picture of Jack D. Daughters appears on right hand side of page President Bellingham Bancorporation] "The word 'synergy' is often overused when it comes to mergers. I prefer to think of this as an opportunity for both organizations to combine their forces and create a higher level of value than either would achieve on their own. It truly is the best of business and personal services in one great community bank." relied on the growth of its traditional retail deposits alone. As of March 31, Horizon had $19.8 million in borrowings and, as opportunities present themselves, Horizon intends to continue to utilize borrowings to obtain low- cost funds and further enhance profitability. Net income for the year increased to $8.6 million and the Corporation's net interest margin continues, at 3.66 percent, to be a solid measure of Horizon's profitability. These were challenging accomplishments during a year of relatively flat interest rates and increased competition. But at the same time, Horizon succeeded in completing several of its major strategic initiatives and we are well positioned for the year ahead. Tools for better business. One of the strategic initiatives Horizon completed during the year was the upgrade of its computer system. This involved replacing nearly every personal computer in the Corporation with higher speed components and increased capacity, and installing a wide-area network that connects all of Horizon's offices. At the same time, the Corporation upgraded its teller and new accounts areas to a platform automation system. These improvements will allow us to better serve our customers, increase communication between offices, and provide a solid foundation from which future technology and enhancements may be launched. Another benefit of the computer system upgrade is that it [Bar graph for Loan Volume appears at bottom of page] Loan Volume 95 - 64.1 96 - 95.6 97 - 110.2 98 - 161.1 99 - 257.6 ============================================================================== 4 LETTER TO STOCKHOLDERS ============================================================================== [Picture of Karla C. Lewis Senior Vice President Real Estate Lending, Horizon Bank] "Helping a customer buy their home is a very personal transaction. Horizon has been helping people with home loans since 1922 and we are committed to providing a high level of service. Now we have the opportunity to bring this same level of service to business banking. I think business customers will enjoy it." represents a significant step toward Year 2000 readiness. We are pleased to report that we have completed testing of our most critical internal systems and the systems of our data processor. These tests indicate that we are well prepared for the new millennium. We feel confident of our ability to serve our customers now and on January 3, 2000, and beyond. Improving service to our customers now and into the new century was the focus of other key efforts during the year. In addition to its new computer system, Horizon deployed additional cash machines (ATMs) throughout its office network. We also upgraded to a new, more capable phone system, expanded the capacity of our 24-hour telephone banking system, and expanded our web site and Internet email capabilities. Customers may now communicate with Horizon in any number of ways and obtain access to cash and account information with more ease and convenience. We are also pleased to update you on our progress to expand our office locations. In March 1999, we relocated our Edmonds office to new, larger facilities in downtown Edmonds. The new office held its grand opening celebration during April and we are happy to report that many new account relationships have already been established. In addition, construction is under way on our new Barkley office, at the corner of Barkley and Woburn, in Bellingham. This new office should be completed in the Fall and will serve a growing area of Whatcom County. We are also pleased to announce that Horizon recently entered into an agreement to purchase land for a new office in the Murphy's Corner area of Mill Creek in Snohomish County. Architectural plans are in progress and construction should begin in the Summer. The un-big bank just got better. The most exciting development of fiscal 1999 was the announcement of our intent to merge with Bellingham Bancorporation. This transaction is expected to close on June 18, ============================================================================== 5 LETTER TO STOCKHOLDERS ============================================================================== [Picture of Elizabeth E. (Beth) Sherry appears on right hand side of page Vice President New Accounts, Horizon Bank] "I came to Horizon from a much larger bank and I can honestly say that we provide a higher level of service. We're called 'the un-big bank' for a reason, and I don't think it has as much to do with our size. It's more about how we relate to our customers. I think the business community will recognize this. And I know they're going to like it." 1999. Not only will the merger provide three more offices for Horizon Bank in Whatcom County and further expand our market share but also, Horizon will become a truly full-service bank, offering the best of business and personal banking in one great community bank. The merger will also help Horizon accomplish one of its other long-term goals - to diversify its business and provide commercial products and services. Bellingham Bancorporation, and its subsidiary, the Bank of Bellingham, provide a complete commercial product line and ready base of commercial customers. Horizon's ability to deliver these products to its existing three-county market holds great potential. Last, but most important, the merger with Bellingham Bancorporation provides Horizon with one more element that will help it achieve its goals: experienced people. The employees of the Bank of Bellingham have many years of commercial banking service. Combined with Horizon's experience in real estate, consumer, and retail products, this merger will create a combined institution that is better able to serve the needs of its customers and the local community. Looking ahead. Fiscal 1999 was a challenging year. Punctuated by record demand for Horizon's products and services, a flat interest rate environment, completion of several strategic initiatives and the beginning of a whole new way of doing business, we are very proud of the results and efforts of our employees. As we look ahead to the new banking millennium, I cannot help but feel that we are well prepared for what lies ahead. We look forward to our Annual Meeting of Stockholders on July 27, and we thank you for your continued support. V. Lawrence Evans President and Chief Executive Officer George W. Gust Chairman of the Board ============================================================================== 6 Management's Discussion & Analysis ============================================================================== General Horizon Financial Corp. was formed under Washington law on May 22, 1995, and became the holding company for Horizon Bank, effective October 13, 1995. 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. 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. The Bank's operations are conducted through 12 full-service office facilities, located in Whatcom, Skagit and Snohomish counties in Northwest Washington. The Bank is currently building 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 office (approximately 15,000 square feet) will serve as an operation center to support additional growth for the Corporation. Completion of construction is scheduled for the fourth quarter of 1999. The Bank is also currently working on plans to build an office at Murphy's Corner near Mill Creek, which will replace the Bank's current leased location in that area. During the fiscal year ended March 31, 1999, the Bank relocated its Edmonds office by purchasing the Dayton Place building at the corner of 5th and Dayton in downtown Edmonds. The Bank's management continues to research sites for future development, with emphasis on locations in the growing Snohomish County markets. At its March 19, 1998 meeting, the Board of Directors authorized the repurchase of up to 10% (approximately 747,000 shares) of the Corporation's outstanding common stock over a 24 month period. During the fiscal year ended March 31, 1999, the Corporation repurchased 13,900 shares of its common stock, compared to no repurchases during the prior year. This repurchase plan has been 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. As of December 11, 1998, the Bank became a member of the Federal Home Loan Bank of Seattle. One of the significant benefits of membership include the ability to supplement the Bank's balance sheet with wholesale funds in order to meet cyclical funding needs and to assist management in its interest rate risk management efforts. On January 18, 1999, the Corporation announced a definitive agreement to merge with Bellingham Bancorporation, creating a company with combined assets in excess of $652 million. As a result of the transaction, Bellingham Bancorporation will be merged into Horizon Financial Corp. The transaction has received the necessary approvals, and is expected to close on June 18, 1999. The transaction is expected to be accounted for as a pooling of interests. Results of Operations Total consolidated assets for the Corporation as of fiscal year-end March 31, 1999 were $602,125,761, an increase of 10.05% from the March 31, 1998 level of $547,146,296. This increase in assets was due primarily to the growth in loans receivable, which increased 11.72% to $484,544,820 from $433,697,267. Real estate and commercial loans originated for fiscal 1999 were $244,789,677, compared to fiscal 1998 of $148,660,761 and fiscal 1997 of $100,579,512. The increase in total real estate loan originations in fiscal 1999 was the result of lower long-term interest rates and continued strong demand for refinance mortgages, along with an increased focus on commercial real estate lending. Consumer lending originations were little changed, with annual activity increasing slightly to $12,798,847 from $12,462,472 in fiscal 1998, and $9,606,372 in fiscal 1997. The lack of consumer loan growth was due in 7 Management's Discussion & Analysis ============================================================================== large part to the lower level of interest rates for first mortgages, which led many borrowers to refinance their existing first mortgage loans, rather than utilize second mortgage financing options. The Bank sold $42,468,549 of real estate loans in fiscal 1999, compared to $29,370,377 in fiscal 1998. 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 $36,830,692 in long term, fixed rate mortgages during fiscal 1999, compared to $12,622,660 in fiscal 1998. 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 $512,375,732 at March 31, 1999 an increase of 10.60% from $463,251,499 at March 31, 1998. The increase in liabilities was due in large part to the growth in savings deposits, which increased 6.89% to $481,118,998 from $450,125,058. In addition, the Bank's balance sheet included $19,800,000 in other borrowings at March 31, 1999, compared to no borrowings at March 31, 1998. During the year, the Bank increased the size of its balance sheet with borrowings from the Federal Home Loan Bank and with reverse repurchase agreements. Shareholder equity in fiscal 1999 increased 6.98% to $89,750,029 from $83,894,797 at fiscal 1998 year end. This increase was due primarily to the growth in retained earnings, net of the $.44 per share in dividends paid during the fiscal year ended March 31, 1999. The Corporation remains strong in terms of its capital position, with a shareholder equity-to-assets ratio of 14.91% at March 31, 1999, compared to 15.33% at March 31, 1998. Net Interest Income Net interest income in fiscal 1999 was $19,927,032, a 6.76% increase from fiscal 1998 of $18,665,514, compared to $17,878,339 in fiscal 1997. Total interest income increased in fiscal 1999 to $43,203,418, a 5.63% increase from fiscal 1998 of $40,900,914, compared to $38,710,639 in fiscal 1997. Interest income on loans in fiscal 1999 was $37,449,922, a 6.97% increase from $35,008,202 in fiscal 1998, compared to $33,812,005 in fiscal 1997. This increase in interest income was lower than the percentage increase in loans receivable as many borrowers refinanced their existing loans in last year's historically low interest rate environment. Therefore, the overall increase in interest income can be attributed to the growth in loans receivable, not to higher interest rates. Interest and dividends on investments and mortgage-backed securities was $5,753,496 in fiscal 1999, a 2.36% decrease from $5,892,712 in fiscal 1998, compared to $4,898,634 in fiscal 1997. The decrease in fiscal 1999 was primarily due to the lower level of interest rates during the year. The increase in fiscal 1998 compared to fiscal 1997 was due primarily to the fact that the Bank has been shifting assets from loans receivable to investments by securitizing long-term fixed rate mortgages with the Federal Home Loan Mortgage Corporation in an effort to improve its liquidity and to better manage its interest rate risk profile. Total interest expense in fiscal 1999 increased to $23,276,386, a 4.68% increase over fiscal 1998 of $22,235,400, compared to $20,832,300 in fiscal 1997. Interest on deposits increased 2.43% in fiscal 1999, to $22,776,189 compared to $22,235,400 in fiscal 1998, and $20,832,300 in fiscal 1997. This increase in fiscal 1999 occurred while the Bank's deposit base increased by 6.89%. The low interest rate environment was favorable to the Bank's cost of savings in fiscal 1999 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 $500,197 in fiscal 1999, compared to - -0- in fiscal 1998, as the Bank borrowed funds in the wholesale markets in order to 8 Management's Discussion & Analysis ============================================================================== further leverage its balance sheet and better manage its interest rate risk profile. Provision for Losses on Loans The provision for losses on loans increased in fiscal 1999 to $395,000 from $355,000 in fiscal 1998 and $200,400 in fiscal 1997. These figures include both specific and general reserves. As of March 31, 1999, the allowance for loan loss reserves was $3,956,150. The general and specific reserves as of March 31, 1999 represent .82% of loans receivable, compared to .83% as of March 31, 1998 and .85% at March 31, 1997. The Bank's management considers this to be an adequate level of reserves at this time. As of March 31, 1999, there were two loans in the Bank's portfolio over 90 days delinquent, with balances totaling $373,141, which represented .06% of total assets. This is up from two loans with balances totaling $50,345 or .01% of assets at March 31, 1998. Non-Interest Income Non-interest income in fiscal 1999 was $1,964,363, an increase of 16.15% from fiscal 1998 of $1,691,273, compared to $1,583,063 in fiscal 1997. Service fee income was $1,611,999 in fiscal 1999, a 35.35% increase from fiscal 1998 of $1,191,004, compared to $1,037,308 in fiscal 1997. The increases in fiscal 1999 & 1998 were 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. Other non-interest income decreased in fiscal 1999 to $382,162 from $416,761 in fiscal 1998, compared to $276,840 in fiscal 1997. The primary factor contributing to the difference in fiscal 1998 was an adjustment of $150,000 in specific loan loss reserves due to a large principal reduction on a loan with an allocated reserve made during that year. An increase in Visa debit card income continued to enhance the Bank's other non-interest income in fiscal 1999. The net gain/(loss) on sale of loans decreased to ($359,130), in fiscal 1999, from ($356,668) in fiscal 1998, compared to ($31,188) in fiscal 1997. 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 1999, the fees recognized from loan sales exceeded the losses from the sale of these loans by $234,872. The net gain on sale of investments decreased to $329,332 in fiscal 1999, compared to $440,176 in fiscal 1998, and $300,103 in fiscal 1997. 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 1999 increased to $8,406,932, an 11.13% increase from fiscal 1998 of $7,565,253, compared to $7,460,889 in fiscal 1997. Compensation and employee benefits increased 6.36% in fiscal 1999 to $4,247,081 from $3,993,022 in fiscal 1998, compared to $4,164,945 in fiscal 1997. The increase in fiscal 1999 is primarily due to the overall growth of the bank. The higher figures in fiscal 1997 were due primarily to the one-time recognition of $277,525 in expenses relating to the Bank's retirement program recognized in that year. Building occupancy expense was $1,346,724, in fiscal 1999, a 16.87% increase from $1,152,365 in fiscal 1998, compared to $1,120,585 in fiscal 1997. The primary reasons for the increase in fiscal 1999 relate to increased expenses for computer hardware upgrades, software expenses and the relocation of the Bank's Edmonds office. 9 Management's Discussion & Analysis ============================================================================== Other non-interest expenses increased to $1,819,741 in fiscal 1999, a 30.84% increase from $1,390,860 in fiscal 1998, compared to $1,413,505 in fiscal 1997. The increase in fiscal 1999 was due in part to additional expenses related to the significant technology upgrades implemented during the year, along with expenses relating to the pending merger with Bellingham Bancorporation. Data processing expenses declined in 1999 to $548,560 after increasing significantly in fiscal 1998 to $612,799 from $413,512 in fiscal 1997. The increase in fiscal 1998 was due in large part to the recognition of expenses relating to upgrading the technology at the Bank, including the installation of a teller platform system and the implementation of a Wide Area Network. The benefits of these enhancements should include: an enhanced operating platform for tellers and new accounts personnel; a faster, more powerful computer network capable of interoffice communication and file sharing; a better foundation for future technologies; and more efficient operations. Advertising and Marketing expenses increased 6.88% to $444,826 in fiscal 1999 from $416,207 in fiscal 1998, compared to $348,342 in fiscal 1997. This increase in fiscal 1999 is due in part to expenses relating to increased direct mail marketing utilizing the Bank's Marketing Customer Information File, along with rolling out the "Un-Big Bank" image campaign during the year. Provisions for Income Tax Income tax expense increased to $4,456,462 in fiscal 1999, from $4,214,657 in fiscal 1998, compared to $3,996,693 in fiscal 1997. The Bank's effective tax rate was approximately 34% in each of the past three fiscal years. Net Income Annual earnings of $8,633,001 for fiscal 1999 represent a 5.00% increase from fiscal 1998 earnings of $8,221,877, compared to fiscal 1997 earnings of $7,803,420. Basic earnings per share for fiscal 1999 were $1.15 on weighted average shares of 7,491,280, compared to basic earnings per share of $1.11 on weighted average shares of 7,435,782 in fiscal 1998, and basic earnings per share of $1.04 on weighted average shares of 7,478,666 in fiscal 1997 (as restated for the 15% stock dividend declared in April 1997). 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, 1999, the Bank had liquid assets (cash and marketable securities with maturities of one year or less) with a book value of $24,420,809. As of March 31, 1999, the total book value of investments and mortgage-backed securities was $88,659,487, compared to a market value of $93,793,202 with an unrealized gain of $5,133,715. On March 31, 1998, the book value of investments and mortgage-backed securities was $89,869,807 compared to a market value of $94,938,374, with an unrealized gain of $5,068,567. 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 Federal Home Loan Bank 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, 1999 was $89,750,029 or 14.91% of assets, compared to $83,894,797 or 15.33% of assets at March 31, 1998. The Bank continues to exceed the 5.0% minimum required by the FDIC in order to be considered well capitalized. The Bank's total risk-adjusted capital 10 Management's Discussion & Analysis ============================================================================== ratio as of March 31, 1999 was 26.28%, compared to March 31, 1998 of 28.46%. These figures are well above the well-capitalized minimum of 10% required by the FDIC. Forward Looking Statements In this document, Horizon has included 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 to the protections of such safe harbor provisions of said Act with respect to all "forward looking statements". Horizon has used "forward looking statements" to describe future plans and strategies, including expectations of Horizon'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. 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, 1999, 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, 1999, the Bank's one year GAP position was a negative 33.70%, compared to a negative 38.67% at March 31, 1998. 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 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 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 11 Management's Discussion & Analysis ============================================================================== curve is very flat, 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 a very flat yield curve environment. Following the completion of the merger with the Bank of Bellingham, the combined Bank's balance sheet should become less liability sensitive, as many of the Bank of Bellingham's assets are variable rate products which generally re-price more rapidly than Horizon's existing asset base. Quantitative Disclosures About Market Risk - ------------------------------------------------------------------------------ The table below represents the balances of the Bank's financial instruments at March 31, 1999. 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. 2 Years 3 Years 4 Years Average Within 1 Year To To To To Beyond Fair Yield 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years Total Value --------------------------------------------------------------------------------- Dollars in thousands Interest-Sensitive Assets: Loans receivable 8.11 $65,456 $54,843 $71,843 $51,430 $46,754 $194,219 $484,545 $488,642 Mortgage-backed securities 6.41 7,235 5,663 4,568 4,066 3,619 29,278 54,429 55,096 Investments and other interest-earning assets 6.20 21,413 4,546 385 4,634 250 3,002 34,230 38,697 Interest-Sensitive Liabilities: Checking accounts 1.50 - 10,796 10,796 3,599 3,599 7,197 35,987 35,987 Money market/ Ultimate accounts 3.93 19,864 6,621 6,621 6,621 6,621 19,866 66,214 66,214 Savings accounts 3.05 - 10,170 10,170 3,390 3,390 6,779 33,899 33,899 Certificates of deposit 5.64 252,249 50,694 7,303 4,796 9,311 20,666 345,019 347,708 Other Borrowings 5.15 14,800 5,000 - - - - 19,800 19,786 Off-Balance Sheet Items: Commitments to extend credit 6.93 7,161 - - - - - 7,161 7,161 Unused lines of credit 9.25 9,077 - - - - - 9,077 9,077
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. 12 Management's Discussion & Analysis ============================================================================== General The year 2000 ("Y2K") issue centers on the potential inability of computer systems and programs to recognize the year 2000. Many existing computer programs and systems originally were programmed to allow only two digits to identify the calendar year in the date field. If left unchanged, these programs and systems might interpret "00" as the year 1900, rather than as the year 2000. Regulation Financial institution regulators have increased their focus upon Year 2000 issues and have issued guidance concerning the responsibilities of senior management and directors. The sole subsidiary of Horizon Financial Corp., Horizon Bank ("Bank"), has been examined by the FDIC and the State of Washington's Department of Financial Institutions on several occasions, including both on-site and off-site exams. The Bank's most recent exam was conducted by the State of Washington in February of 1999. Regulations do not allow the Bank to make public the results of the State or FDIC examinations. However, the Bank's Board of Directors reviews each report, and the Board is satisfied with management's progress to date regarding Year 2000 issues. The Federal Financial Institution Examination Council ("FFIEC") has issued several interagency statements on Year 2000 issues. These statements require financial institutions to proceed through five phases of year 2000 preparedness. The following sections summarize these phases, and the Bank's progress to date in each phase: Awareness Phase The Bank has established a formal Year 2000 plan and created an internal Year 2000 committee, which has been meeting on this issue since 1997. This phase focused on identifying those systems and programs that had the potential of being affected by Year 2000 risks. This phase also included educating the Bank's employees about Year 2000 issues and resulted in a bank wide effort to identify potential problems related to the Year 2000. This phase was substantially completed early in 1998. Assessment Phase This phase focused on completing assessments of hardware, software and other computer applications in order to identify risks and monitor Year 2000 progress. Further, this phase included a prioritization of Year 2000 risks, to identify which systems were mission critical systems for the Bank's business, and which were considered less important in terms of potential adverse impact to the Bank. This assessment was substantially completed in mid 1998. Renovation Phase Following the Assessment Phase, the Bank moved into the renovation phase, which focused on identifying solutions to potential Year 2000 problems with its systems and programs. During the fourth quarter of 1998, the Bank completed a major personal computer renovation, which included new machines at all teller stations, and numerous other network upgrades. While the primary purpose for this renovation was not related to the Year 2000 issue, compliance efforts were enhanced by this project, since computers with older BIOS chips are more likely to be susceptible to Year 2000 problems than newer computers. The Bank decided, however, that even these new machines would be tested for Year 2000 readiness. The renovation phase is substantially completed at this time. Validation Phase This phase was designed to test the ability of hardware and software to accurately process date sensitive data. The Bank is working with its data processor, Fiserv, as well as other vendors, to make sure that their computers and software programs have been tested for Year 2000 readiness. As an example, the Bank conducted extensive testing of the Fiserv system in December 1998, with additional testing performed in April of 1999. Based on the analysis of these test results, along with the extensive amount of data received on the Year 2000 issue from Fiserv over the past two years, the Bank is satisfied with the 13 Management's Discussion & Analysis ============================================================================== progress made by its service provider in its Year 2000 efforts. In addition, the Bank is satisfied with the results of the testing of the Bank's other vendors and internal computer systems, along with the renovations that have been completed to date. Year 2000 testing expenses are anticipated to total less than $50,000, the majority of which have already been paid by the Bank through its fiscal year ended March 31, 1999. Future expenses relating to Year 2000 issues are not anticipated to have a material impact on the Bank's financial statements. The Validation phase is substantially complete at this time. Implementation Phase The Bank has completed the implementation phase for all systems currently being utilized. Any new systems deployed prior to year-end will also be reviewed for Year 2000 compliance. In light of the pending merger with the Bank of Bellingham, Horizon Bank's management will be working closely with Bank of Bellingham's management to ensure that the programs utilized by the Bank of Bellingham will not create any additional Year 2000 concerns. Early in 1999, the Bank's Year 2000 focus shifted from the five phases presented above, to the development of business resumption and contingency plans. Guidelines provided by the FFIEC set forth four phases in this contingency planning process, and the paragraphs below set forth the Bank's progress to date in these phases. Organizational Planning Guidelines This phase focused on establishing organizational planning guidelines that define the business continuity planning strategy for the Bank, and the FDIC expects institutions to complete this phase prior to March 31, 1999. The Bank has substantially completed this phase of the Contingency Planning process. Business Impact Analysis Irrespective of best efforts towards Year 2000 compliance, the possibility exists that there may be an interruption of business around the turn of the century. Therefore, the Bank has completed a Business Impact Analysis, which assesses the effects of potential system failures in each core business process, such as deposit taking, check cashing, cash withdrawals and lending services. This analysis sets forth Year 2000 event scenarios and considers the risks of both internal and external infrastructure failures on each core business process and determines the minimum acceptable level of outputs and services for each process. This analysis will be conducted as a joint effort with the Bank of Bellingham, with members from each institution's management team working on Year 2000 issues from this point forward. While this analysis will be an ongoing process during the remainder of 1999, the Business Impact Analysis was substantially completed prior to March 31, 1999. Business Resumption Contingency Plan Upon completion of the Business Impact Analysis, the Bank's management began developing a Business Resumption Contingency Plan. Said plan shall provide the framework to operate the Bank in the event that any of the Bank's core business processes experience Year 2000 related problems. Specifically, the plan shall set forth logistical guidelines and time frames to assist the Bank's personnel in its business resumption contingency planning efforts. This plan shall be considered a supplement to the Bank's Disaster Recovery Plan, already in place. The Business Resumption Contingency Plan is nearing completion, and will be substantially completed prior to June 30, 1999. Validation of Business Resumption Contingency Plan Finally, the Bank's Internal Audit Department is in the process of designing methods to validate its Business Resumption Contingency Plan to ensure that the plan will be effective, if needed. Said Validation methods will be substantially completed by June 30, 1999. While there can be no guarantee of total Year 2000 compliance, be assured that Horizon Bank is taking this issue very seriously and is working diligently to minimize potential impacts to its customers and shareholders as a result of the turn of the century. 14 HORIZON FINANCIAL CORP. Independent Auditor's Report and Consolidated Financial Statements March 31, 1999, 1998 and 1997 15 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, 1999 and 1998, 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, 1999, 1998 and 1997. 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, 1999 and 1998, and the results of their operations and cash flows for each of the years ended March 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. /s/ Moss Adams LLP Bellingham, Washington May 7, 1999 16 HORIZON FINANCIAL CORP. CONSOLIDATED STATEMENT OF FINANCIAL POSITION March 31, 1999 and 1998 ASSETS 1999 1998 ------------ ------------ Cash and cash equivalents $ 7,781,073 $ 6,878,615 Interest-bearing deposits 8,052,381 9,980,349 Investment securities Available-for-sale (amortized cost 1999: $20,620,191; 1998: $29,314,764) 25,047,312 33,813,752 Held-to-maturity (estimated fair value 1999: $1,034,061; 1998: $2,047,811) 994,189 1,985,941 Mortgage-backed securities Available-for-sale (amortized cost 1999: $43,469,587;1998: $33,100,230) 43,886,859 33,352,267 Held-to-maturity (estimated fair value 1999: $11,208,987; 1998: $15,744,195) 10,959,539 15,488,523 Federal Home Loan Bank Stock 4,563,600 - Loans receivable 484,544,820 433,697,267 Accrued interest and dividends receivable 3,739,470 3,678,614 Bank premises and equipment, net 9,905,362 6,046,468 Other assets 2,651,156 2,224,500 ------------ ------------ TOTAL ASSETS $602,125,761 $547,146,296 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $481,118,998 $450,125,058 Accounts payable and other liabilities 5,924,556 7,925,825 Securities sold under agreements to repurchase 14,800,000 - Other borrowed funds 5,000,000 - Advances by borrowers for taxes and insurance 928,618 920,995 Income tax currently payable 770,986 124,893 Net deferred income tax liabilities 2,572,474 2,879,728 Deferred compensation 1,260,100 1,275,000 ------------ ------------ Total liabilities 512,375,732 463,251,499 ------------ ------------ 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; 7,771,327 and 7,726,762 issued and outstanding, respectively 7,771,327 7,726,762 Additional paid-in capital 54,388,785 53,821,396 Retained earnings 27,845,086 22,509,593 Unearned ESOP shares (350,000) (400,000) Accumulated other comprehensive income 3,197,300 3,135,677 Treasury stock, 262,990 and 249,090 shares, at cost (3,102,469) (2,898,631) ------------ ------------ Total stockholders' equity 89,750,029 83,894,797 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $602,125,761 $547,146,296 ============ ============ See accompanying notes to these financial statements. 17 HORIZON FINANCIAL CORP. CONSOLIDATED STATEMENT OF INCOME Years Ended March 31, 1999, 1998 and 1997 1998 1997 1996 ------------- ------------- ------------ - - INTEREST INCOME Interest on loans $ 37,449,922 $ 35,008,202 $ 33,812,005 Investment and Mortgage- backed securities Taxable interest 5,543,463 5,681,821 4,634,411 Nontaxable interest income 146,466 162,618 168,057 Dividends 63,567 48,273 96,166 ------------- ------------- ------------ - - Total interest income 43,203,418 40,900,914 38,710,639 ------------- ------------- ------------ - - INTEREST EXPENSE Interest on deposits 22,776,189 22,235,400 20,832,300 Interest on other borrowings 500,197 - - ------------- ------------- ------------ - - Total interest expense 23,276,386 22,235,400 20,832,300 ------------- ------------- ------------ - - Net interest income 19,927,032 18,665,514 17,878,339 PROVISION FOR LOAN LOSSES 395,000 355,000 200,400 ------------- ------------- ------------ - - Net interest income after provision for loan losses 19,532,032 18,310,514 17,677,939 ------------- ------------- ------------ - - NONINTEREST INCOME Service fees 1,611,999 1,191,004 1,037,308 Other 382,162 416,761 276,840 Net gain (loss) on sales of loans (359,130) (356,668) (31,188) Net gain on sale of investment securities 329,332 440,176 300,103 ------------- ------------- ------------ - - Total noninterest income 1,964,363 1,691,273 1,583,063 ------------- ------------- ------------ - - NONINTEREST EXPENSE Compensation and employee benefits 4,247,081 3,993,022 4,164,945 Building occupancy 1,346,724 1,152,365 1,120,585 Other expenses 1,819,741 1,390,860 1,413,505 Data processing 548,560 612,799 413,512 Advertising 444,826 416,207 348,342 ------------- ------------- ------------ - - Total noninterest expense 8,406,932 7,565,253 7,460,889 ------------- ------------- ------------ - - INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAX 13,089,463 12,436,534 11,800,113 ------------- ------------- ------------ - - PROVISION FOR INCOME TAX Current 4,795,462 3,524,657 3,171,693 Deferred (339,000) 690,000 825,000 ------------- ------------- ------------ - - Total provision for income tax 4,456,462 4,214,657 3,996,693 ------------- ------------- ------------ - - NET INCOME $ 8,633,001 $ 8,221,877 $ 7,803,420 ============= ============= ============= BASIC EARNINGS PER SHARE $ 1.15 $ 1.11 $ 1.04 ======= ======= ======= DILUTED EARNINGS PER SHARE $ 1.14 $ 1.09 $ 1.03 ======= ======= ======= See accompanying notes to these financial statements. 18 HORIZON FINANCIAL CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years Ended March 31, 1999, 1998 and 1997 Common Stock ------------------------- Additional Unearned Number of Paid-In Retained ESOP Shares At Par Capital Earnings Shares --------- ---------- ----------- ------------ -------- BALANCE, March 31,1996 6,579,954 $6,579,954 $39,415,875 $ 31,548,712 $ - Comprehensive income Net income - - - 7,803,420 - Other comprehensive income Change in unrealized gains available- for-sale securities, net taxes of $503,736 - - - - - Total other comprehensive income - - - - - Comprehensive income - - - - - Unearned ESOP shares - - - - (500,000) Recognition of ESOP shares released - - - - 50,000 Cash dividends on common stock at $0.75 per share - - - (4,833,338) - Dividend reinvestment plan 23,743 23,743 304,498 - - Stock options exercised 46,643 46,643 343,305 - - Treasury stock purchased - - - - - --------- ---------- ----------- ------------ -------- BALANCE, March 31, 1997 6,650,340 6,650,340 40,063,678 34,518,794 (450,000) Comprehensive income Net income - - - 8,221,877 - Other comprehensive income Change in unrealized gains on available-for-sale securities, net taxes of $1,293,465 - - - - - Total other comprehensive income - - - - - Comprehensive income - - - - - Recognition of ESOP shares released - - - - 50,000 Cash dividends on common stock at $0.83 per share - - - (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 7,726,762 7,726,762 53,821,396 22,509,593 (400,000) Comprehensive income Net income - - - 8,633,001 - Other comprehensive income Change in unrealized gains on available-for-sale securities, net taxes of $31,744 - - - - - Total other comprehensive income - - - - - Comprehensive income - - - - - Recognition of ESOP shares released - - - - 50,000 Cash dividends on common stock at $0.11 per share - - - (3,297,508) - Dividend reinvestment plan 35,801 35,801 496,461 - - Stock options exercised 8,764 8,764 70,928 - - Treasury stock purchased - - - - - --------- ---------- ----------- ------------ --------- BALANCE, March 31, 1999 7,771,327 $7,771,327 $54,388,785 $ 27,845,086 $(350,000) ========= =========== =========== ============ =========
Accumulated Other Treasury Total Comprehensive Stock Stockholders' Comprehensive Income(Loss) At Cost Equity Income ------------ ---------- ------------- ------------- BALANCE, March 31,1996 $1,602,673 $ - $79,147,214 Comprehensive income Net income - - 7,803,420 $ 7,803,420 Other comprehensive income Change in unrealized gains available- for-sale securities, net taxes of $503,736 (977,840) - (977,840) (977,840) Total other comprehensive ------------ income - - - (977,840) ------------ Comprehensive income - - - $ 6,825,580 Unearned ESOP shares - (500,000) ============ Recognition of ESOP shares released - - 50,000 Cash dividends on common stock at $0.75 per share - - (4,833,338) Dividend reinvestment plan - - 328,241 Stock options exercised - - 389,948 Treasury stock purchased - (2,898,631) (2,898,631) ---------- ---------- ------------- BALANCE, March 31, 1997 624,833 (2,898,631) 78,509,014 Comprehensive income Net income - - 8,221,877 $ 8,221,877 Other comprehensive income Change in unrealized gains on available-for-sale securities, net taxes of $1,293,465 2,510,844 - 2,510,844 2,510,844 Total other comprehensive ------------ income - - - 2,510,844 ------------ Comprehensive income - - - $ 10,732,721 ============ Recognition of ESOP shares released - - 50,000 Cash dividends on common stock at $0.83 per share - - (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 3,135,677 (2,898,631) 83,894,797 Comprehensive income Net income - - 8,633,001 $ 8,633,001 Other comprehensive income Change in unrealized gains on available-for-sale securities, net taxes of $31,744 61,623 - 61,623 61,623 Total other comprehensive ------------ income - - - 61,623 ------------ Comprehensive income - - - $ 8,694,624 Recognition of ESOP shares ============ released - - 50,000 Cash dividends on common stock at $0.11 per share - - (3,297,508) Dividend reinvestment plan - - 532,262 Stock options exercised - - 79,692 Treasury stock purchased - (203,838) (203,838) ----------- ----------- ------------ BALANCE, March 31, 1999 $3,197,300 $(3,102,469) $ 89,750,029 ========== =========== ============ See accompanying notes to these financial statements. 19
HORIZON FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS Years Ended March 31, 1999, 1998 and 1997 Increase (Decrease) in Cash and Cash Equivalents 1999 1998 1997 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,633,001 $ 8,221,877 $ 7,803,420 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 555,740 449,141 443,827 Amortization and deferrals, net 260,919 51,387 (724,355) Provision for loan losses 395,000 355,000 200,400 Provision for deferred income tax (339,000) 690,000 825,000 Changes in assets and liabilities Interest and dividends receivable (60,856) (133,234) 69,557 Interest payable 53,873 (98,714) (55,520) Federal income tax (receivable) payable 646,093 422,085 (363,307) Other assets (426,656) (290,072) (140,600) Other liabilities (1,919,050) (904,241) 4,677,457 ------------- ------------- ------------- Net cash flows from operating activities 7,799,064 8,763,229 12,735,879 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in interest- bearing deposits, net 1,927,968 417,967 (1,642,012) Purchases of investment securities - available- for-sale (4,902,969) (19,278,206) (8,626,426) Proceeds from sales and maturities of investment securities - available- for-sale 13,669,409 13,972,408 16,807,528 Proceeds from maturities of investment securities - held-to-maturity 991,752 6,395,834 7,698,472 Proceeds from maturities of mortgage-backed securities - available-for-sale 25,622,744 4,202,075 712,754 Purchases of mortgage-backed securities - held-to-maturity - 22,544,856 3,388,227 Proceeds from maturities of mortgage-backed securities - held-to-maturity 4,528,984 (6,510,126) (8,816,864) Purchase of Federal Home Loan Bank stock (4,563,600) - - Proceeds from sales of loans 43,141,911 29,370,377 5,038,460 Principal payments on loans 127,257,512 79,122,140 66,132,069 Originations and purchases of loans (258,060,231) (156,090,708) (108,647,972) Purchases of bank premises and equipment (4,414,634) (364,926) (328,469) ------------- ------------- ------------- Net cash flows from investing activities (54,801,154) (26,218,309) (28,284,233) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Change in checking and savings accounts, net 19,051,484 2,349,945 13,055,711 Proceeds from issuance of time deposits 157,374,792 152,668,178 154,013,669 Payments for maturing time deposits (145,432,336) (129,704,352) (144,934,530) Proceeds from securities sold under agreements to repurchase 14,800,000 - - Proceeds from other borrowed funds 5,000,000 - - Common stock issued, net 611,954 800,440 718,189 Cash dividends paid (3,297,508) (6,197,378) (4,833,338) Treasury stock purchased (203,838) - (2,898,631) ------------- ------------- ------------- Net cash flows from financing activities 47,904,548 19,916,833 15,121,070 ------------- ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 902,458 2,461,753 (427,284) CASH AND CASH EQUIVALENTS, beginning of year 6,878,615 4,416,862 4,844,146 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of year $ 7,781,073 $ 6,878,615 $ 4,416,862 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest $ 22,778,750 $ 22,334,114 $ 20,887,820 ============= ============= ============= Cash paid during the year for income tax $ 4,150,000 $ 3,110,000 $ 3,535,000 ============= ============= ============= NONCASH INVESTING AND FINANCING TRANSACTIONS Mortgage loans securitized and exchanged for FHLMC participation certificates $ 36,830,693 $ 12,622,660 $ 28,123,822 ============= ============= ============= See accompanying notes to these financial statements. 20 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Operations - Horizon Financial Corp. (the "Company"), through its wholly-owned subsidiary, Horizon Bank (the "Bank"), provides a full range of mortgage lending services to borrowers and a full range of customer services to depositors through twelve branches located in Whatcom, Skagit and Snohomish Counties of Washington State. The Bank is an FDIC insured, state- chartered stock savings bank. (b) Financial Statement Presentation and Use of Estimates - The financial statements have been prepared in accordance with generally accepted accounting principles and reporting practices applicable to the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of revenues and expenses for the period and assets and liabilities as of the balance sheet date. Actual results could differ from estimated amounts. (c) Principles of Consolidation - As of March 31, 1999, 1998, and 1997, 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. (d) 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. (e) 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. (f) 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 December 31, 1999 and 1998. 21 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (g) 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. (h) Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. (i) Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees, net of certain direct loan origination costs, are deferred and recognized as an adjustment of the yield on the related loans, using the interest method. (j) Impaired Loans and Related Income - A loan is considered impaired when management determines that it is probable that all contractual amounts of principal and interest will not be paid as scheduled in the loan agreement. These loans include nonaccruing loans past due 90 days or more, loans restructured in the current year, and other loans that management considers to be impaired. When a loan is placed on nonaccrual status, all interest previously accrued, but not collected, is reversed and charged against interest income. Income on nonaccrual loans is then recognized only when the loan is brought current, or when, in the opinion of management, the borrower has demonstrated the ability to resume payments of principal and interest. Interest income on restructured loans is recognized pursuant to the terms of new loan agreements. Interest income on other impaired loans is monitored and based upon the terms of the underlying loan agreement. However, the recorded net investment in impaired loans, including accrued interest, is limited to the present value of the expected cash flows of the impaired loan, or the observable fair market value of the loan, or the fair value of the loan's collateral. (k) Mortgage Servicing Rights - 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. 22 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Provision for Loan Losses - Management estimates the provision for loan losses by evaluating known and inherent risks in the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. The allowance is based upon factors and trends identified by future market factors beyond the Company's control, which may result in losses or recoveries differing significantly from those provided for in the financial statements. 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. 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. (m) Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Major renewals or betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on the straight-line method over the estimated useful lives of thirty-five years for buildings and three to ten years for equipment. (n) Real Estate Owned - Real estate acquired through foreclosure is recorded at the lower of cost (unpaid loan balance plus foreclosure expenses) less any reserve, or estimated market value. At March 31, 1999 and 1998, the Company did not own any real estate acquired through foreclosure. (o) Income Taxes - The Company reports income and expenses using the accrual method of accounting and files a consolidated tax return which includes its subsidiary. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred taxes result from temporary differences in the recognition of certain income and expense amounts between the Bank's financial statements and its tax returns. (p) Earnings Per Share - 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. (q) Financial Instruments - All financial instruments held or issued by the Bank are held or issued for purposes other than trading. In the ordinary course of business, the Bank enters into off-balance-sheet financial instruments consisting of commitments to extend credit. These commitments are recorded in the financial statements when they are funded. 23 NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (r) Advertising Costs - The Company expenses advertising costs as they are incurred. (s) Stock Options - The Company recognizes the financial effects of stock options in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). Generally, stock options are issued at a price equal to the fair value of the Company's stock as of the grant date. Under APB 25, options issued in this manner do not result in the recognition of employee compensation in the Company's financial statements. Disclosures required by Statement of Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation are provided in Note 14. (t) Reclassifications - Certain reclassifications have been made to prior years' amounts to conform to the current year presentation. These reclassifications have no significant effect on the Bank's previously reported financial position or results of operations. (u) Impact of New Accounting Standards - In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources; and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. In February 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106. This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Rather, it standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. The adoption of these statements did not impact the Company's consolidated financial position, results of operations, or cash flows, because their effects were limited to the form and content of disclosures. The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") which must be adopted by the Company as of April 1, 2000. However, on May 20, 1999 FASB issued an exposure draft that would defer the effective date of this statement by one year. This Statement establishes accounting and reporting standards for derivative financial instruments and for hedging activities. Upon adoption of the Statement, all derivatives must be recognized at fair value as either assets or liabilities in the statement of financial position. Changes in the fair value of derivatives not designated as hedging instruments are to be recognized currently in earnings or are to be recognized as a component of other comprehensive income, depending on the intended use of the derivatives and the resulting designations. Upon adoption, retroactive application of this Statement to financial statements of prior periods is not permitted. The Company is currently in the process of evaluating the impact of SFAS No. 133 on its consolidated financial position and results of operations. 24 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 2 - INTEREST-BEARING DEPOSITS Interest bearing deposits consisted of the following at March 31, 1999 and 1998: 1999 1998 ------------ ------------ Federal funds sold $ 7,825,000 $ 9,395,000 Certificates of deposit 227,381 585,349 ------------ ------------ $ 8,052,381 $ 9,980,349 ============ ============ The Company has purchased securities under an agreement to resell substantially identical securities with a major Seattle-area bank. The amounts advanced under this agreement represent short-term loans and are reflected as interest-bearing deposits in the consolidated statement of financial position. The securities underlying the agreements are comprised of shares of a mutual fund, which trades primarily in U.S. government securities. The underlying investments, which mature within 90 days, are maintained by a third party custodian in an investment pool that is comprised of securities which have been purchased by a variety of institutions under similar agreements to resell. The Company's transactions have been executed under a written custodial agreement that explicitly recognizes the Company's interest in their portion of the total investment pool. NOTE 3 - INVESTMENT SECURITIES The Company's investment policy requires that the Company purchase only high-grade investment securities. Purchases of debt instruments are generally restricted to those rated A or better by a nationally recognized statistical rating organization. The amortized cost and estimated market values of investments, together with unrealized gains and losses, are as follows as of March 31, 1999 and 1998, respectively: 1999 ------------------------------------------------- - - Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ----------- ------------ - - Available-For- Sale Securities State and political subdivisions and U.S. government agency securities $10,813,228 $ 63,716 $ (316) $ 10,876,628 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 20,620,191 4,469,517 (42,396) 25,047,312 ----------- ---------- -------- ------------ Held-To-Maturity Securities State and political subdivisions and U.S. government agency securities 494,379 - (785) 493,594 Corporate debt securities 499,810 40,658 - 540,468 ----------- ---------- -------- ------------ Total held-to-maturity securities 994,189 40,658 (785) 1,034,062 ----------- ---------- -------- ------------ Total investment securities $21,614,380 $4,510,175 $(43,181) $ 26,081,374 =========== ========== ======== ============ 25 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 3 - INVESTMENT SECURITIES (Continued) 1998 ------------------------------------------------- - - Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ----------- ------------ - - Available-For- Sale Securities State and political subdivisions and U.S. government agency securities $20,258,274 $ 97,886 $(15,206) $ 20,340,954 Marketable equity securities 339,161 4,403,537 - 4,742,698 Corporate debt securities 8,717,329 14,898 (2,127) 8,730,100 Total available-for- ----------- ---------- -------- ------------ sale securities 29,314,764 4,516,321 (17,333) 33,813,752 ----------- ---------- -------- ------------ Held-To-Maturity Securities State and political subdivisions and U.S. government agency securities 1,486,248 334 (1,739) 1,484,843 Corporate debt securities 499,693 63,275 - 562,968 ----------- ---------- -------- ------------ Total held-to-maturity securities 1,985,941 63,609 (1,739) 2,047,811 ----------- ---------- -------- ------------ Total investment securities $31,300,705 $4,579,930 $(19,072) $ 35,861,563 =========== ========== ======== ============ The amortized cost and estimated fair value of investment securities at March 31, 1999 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. 1999 ------------------------------------------------------ - - 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 $ 6,445,713 $ 6,470,277 $ 494,379 $ 493,594 Two to five years 4,217,515 4,252,550 - - Five to ten years 150,000 153,801 - - ----------- ----------- ---------- ---------- 10,813,228 10,876,628 494,379 493,594 ----------- ----------- ---------- ---------- Corporate debt securities One year 8,569,112 8,561,673 - - Two to five years 900,000 903,937 499,810 540,468 Five to ten years - - - - ----------- ----------- ---------- ---------- 9,469,112 9,465,610 499,810 540,468 ----------- ----------- ---------- ---------- Marketable equity securities (liquid) 337,851 4,705,074 - - ----------- ----------- ---------- ---------- Total investment securities $20,620,191 $25,047,312 $ 994,189 $1,034,062 =========== =========== ========== ========== 26 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 3 - INVESTMENT SECURITIES (Continued) Proceeds from sales of investments and gross realized gains and losses on investment sales were as follows for the year ended March 31: 1999 1998 1997 ---------- ---------- -------- Proceeds from sales of investments $ - $1,949,359 $374,175 ========== ========== ======== Gross gains realized on sales of investments $ - $ 443,766 $303,072 ========== ========== ======== Gross losses realized on sales of investments $ - $ 3,590 $ $2,969 ========== ========== ======== Information about concentrations of investments in particular industries for marketable equity securities and corporate debt securities at March 31 consist of the following: 1999 1998 ----------------------- --------------------- - - Market Market Cost Value Cost Value ---------- ---------- ---------- --------- - - Marketable equity securities Banking $ 318,380 $ 968,387 $ 318,380 $1,333,136 FHLMC common stock 18,008 3,152,187 19,318 2,798,812 Other 1,463 584,500 1,462 610,750 ---------- ---------- ---------- ---------- $ 337,851 $4,705,074 $ 339,160 $4,742,698 ========== ========== ========== ========== Corporate debt securities Finance companies $8,569,112 $8,561,673 $7,813,687 $7,826,725 Private utilities 900,000 903,937 903,642 903,375 ---------- ---------- ---------- ---------- $9,469,112 $9,465,610 $8,717,329 $8,730,100 ========== ========== ========== ========== At March 31, 1999 and 1998, U.S. government agency and corporate debt securities of $1,000,000 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. NOTE 4 - MORTGAGE-BACKED SECURITIES Mortgage-backed securities at March 31 consist of the following: 1999 -------------------------------------------------- - - Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ---------- - - Available-for-sale securities $43,469,587 $ 565,079 $ (147,808) $43,886,859 Held-to-maturity securities 10,959,539 259,122 (9,674) 11,208,987 ----------- ----------- ----------- ---------- - - Total mortgage-backed securities $54,429,126 $ 824,201 $ (157,482) $55,095,846 =========== =========== ========== =========== 1998 -------------------------------------------------- - - Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ---------- - - Available-for-sale securities $33,100,230 $ 333,595 $ (81,558) $33,352,267 Held-to-maturity securities 15,488,523 307,729 (52,057) 15,744,195 ----------- ----------- ----------- ---------- - - Total mortgage-backed securities $48,588,753 $ 641,324 $ (133,615) $49,096,462 =========== =========== ========== =========== 27 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 4 - MORTGAGE-BACKED SECURITIES (Continued) The amortized cost and estimated fair value of mortgage-backed securities at March 31, 1999 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. 1999 ------------------------------------------------------ - -- Available-For-Sale Held-To-Maturity -------------------------- ------------------------- - -- Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ----------- ----------- ------------ --- - ---------- Mortgage-Backed Securities One year $ 903,151 $ 895,133 $ - $ - Two to five years 4,381,797 4,332,280 881,182 893,433 Six to ten years 1,709,140 1,714,290 7,542,837 7,604,690 After ten years 36,475,499 36,945,157 2,535,520 2,710,864 ----------- ----------- ------------ ---------- - - Total mortgage- backed securities $43,469,587 $43,886,860 $ 10,959,539 $11,208,987 =========== =========== ============ =========== All of the above mortgage-backed securities are rated AAA by a nationally recognized statistical rating organization. NOTE 5 - LOANS RECEIVABLE Loans receivable (collateralized principally by properties in the Whatcom, Skagit and Snohomish Counties of Washington State) at March 31 consist of the following: 1999 1998 ------------- ------------- First mortgage loans Conventional $ 632,505,211 $ 524,805,125 Construction - conventional 22,763,297 24,883,763 FHA 8,408 11,612 VA 5,249 6,741 Real estate contracts 122,129 130,240 ------------- ------------- 655,404,294 549,837,481 Less participating interests sold (163,526,986) (112,251,375) ------------- ------------- Net of first mortgage loans 491,877,308 437,586,106 Participation loan interests 838,422 1,802,347 Home equity loans 8,532,376 11,645,867 Home equity LOC 2,126,742 1,297,603 Loans on savings deposits 998,679 1,206,550 Consumer loans 3,364,407 3,209,353 Other loans 74,597 82,938 ------------- ------------- 507,812,531 456,830,764 Less: Undisbursed loan proceeds (12,163,897) (12,635,603) Deferred loan fees (7,147,664) (6,886,744) Allowance for loan losses (3,956,150) (3,611,150) ------------- ------------- $ 484,544,820 $ 433,697,267 ============= ============= 28 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 5 - LOANS RECEIVABLE (Continued) The Company originates both adjustable and fixed interest rate loans. Adjustable rate loans typically contain annual rate increase caps (2%) and loan lifetime rate increase caps (6% to 8%). At March 31, 1999, 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 $ 4,912,293 Less than one year $ - One to two years 5,839,987 One to two years - Two to five years 47,243,362 Two to five years 560,436 Five to ten years 91,680,374 Five to ten years 621,740 Over ten years 344,125,817 Over ten years 12,828,522 Real estate loans serviced for others are $163,526,986 and $112,251,375, respectively, as of March 31, 1999 and 1998. Impaired loans on a nonaccrual basis or restructured, and the related interest, were not material at March 31, 1999 and 1998. The allowance for loan losses at March 31 and changes during the year are as follows: 1999 1998 1997 -------------- -------------- ------------- Balance, beginning of year $ 3,406,150 $ 3,236,150 $ 3,126,150 Balance, beginning of year $ 3,611,150 $ 3,406,150 $ 3,236,150 Provision for loan losses 395,000 355,000 200,400 Adjustment to reserves (50,000) (150,000) (30,400) -------------- -------------- ------------- Balance, end of year $ 3,956,150 $ 3,611,150 $ 3,406,150 ============== ============== ============= NOTE 6 - MORTGAGE SERVICING RIGHTS Loan costs allocated to mortgage servicing rights were as follows as of March 31, 1999 and 1998: 1999 1998 ------------ ----------- Beginning balance $ 697,206 $ 336,101 Additions for new loans 779,592 405,064 Amortization (141,535) (43,959) Ending balance 1,335,263 697,206 Valuation allowance for impairment mortgage servicing rights (703,074) (370,035) ------------ ----------- Mortgage servicing rights, net $ 632,189 $ 327,171 ============ =========== Changes in the valuation allowance for impairment of mortgage servicing was as follows: Beginning balance $ (370,035) $ (179,743) Additions (409,921) (214,292) Credited to income 76,882 24,000 ------------ ----------- Ending balance $ (703,074) $ (370,035) ============ =========== 29 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 7 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE Accrued interest and dividends receivable at March 31 is summarized as follows: 1998 1997 ------------ ------------ Investment securities $ 650,808 $ 614,563 Investment securities $ 467,070 $ 650,808 Mortgage-backed securities 285,052 260,353 Loans receivable 2,977,903 2,759,202 Dividends on marketable equity securities 9,445 8,251 ------------ ------------ $ 3,739,470 $ 3,678,614 ============ ============ NOTE 8 - PREMISES AND EQUIPMENT Premises and equipment at March 31 consisted of: 1999 1998 ------------ ------------ Buildings $ 6,812,296 $ 5,298,206 Equipment 5,317,024 4,034,632 ------------ ------------ 12,129,320 9,332,838 Accumulated depreciation (5,270,261) (4,845,137) ------------ ------------ 6,859,059 4,487,701 Land 3,046,303 1,558,767 ------------ ------------ $ 9,905,362 $ 6,046,468 ============ ============ NOTE 9 - DEPOSITS A comparative summary of deposits at March 31 follows (the contractual or weighted average interest rates are indicated in parentheses): 1999 1998 ------------- ------------ Demand deposits Savings (3.38%, 3.45%) $ 33,899,713 $ 32,409,140 Checking (1.67%, 1.68%) 29,955,999 25,033,979 Checking (noninterest-bearing) 6,030,815 4,140,517 Money market (3.42%, 3.51%) 17,364,925 16,593,831 Ultimate Money Market (3.95%, 4.42%) 48,848,798 38,871,298 ------------- ------------ 136,100,250 117,048,765 ------------- ------------ Time certificates of deposit Less than 6.00% 316,663,573 298,913,335 6.00% to 7.99% 27,049,978 30,185,878 8.00% to 9.99% 1,305,197 3,977,080 ------------- ------------ 345,018,748 333,076,293 ------------- ------------ Total deposits $ 481,118,998 $450,125,058 ============= ============ Time deposit accounts of $100,000 or more amount to $86,027,981 and $81,482,382 at March 31, 1999 and 1998, respectively. 30 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 9 - DEPOSITS (Continued) Time certificate of deposit maturities at March 31 are as follows: 1999 ----------------------------------------- Variable Fixed Rate Rate Total 1997 ----------- ------------ ------------ ------------ Within one year $ 4,604,131 $229,995,741 $234,599,872 $239,740,538 One to two years 1,815,509 50,693,873 52,509,382 33,086,263 Two to three years 475,154 7,303,306 7,778,460 11,859,815 Three to four years 987,801 4,796,498 5,784,299 5,316,916 Four to five years 7,734,496 9,311,228 17,045,724 5,081,293 Over five years 6,636,249 20,664,762 27,301,011 37,991,468 ------------ ------------ ------------ ------------ $ 22,253,340 $322,765,408 $345,018,748 $333,076,293 ============ ============ ============ ============ 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, 1999 and 1998 is 4.95 percent and 5.08 percent, respectively. Interest expense on deposits for the years ended March 31 is summarized as follows: 1999 1998 1997 ----------- ----------- ----------- Money market $ 2,264,215 $ 2,217,726 $ 2,169,938 Checking 488,125 461,249 427,690 Savings 1,018,023 1,064,260 1,039,920 Certificates of deposit 19,005,826 18,492,165 17,194,752 ----------- ----------- ----------- $22,776,189 $22,235,400 $20,832,300 =========== =========== =========== NOTE 10 - 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. The securities underlying the agreements were held by a safekeeping agent not under control of the Bank. Securities sold under agreements to repurchase were $14,800,000 as of March 31, 1999, with interest rates ranging from 4.89% to 5.30%. The Company has collateralized these agreements with mortgage-backed securities totaling approximately $16 million. Maturities for the repurchase agreements are $4,910,000 in June 1999, $4,890,000 in December 1999, and $5,000,000 in September 2000. NOTE 11 - 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, 1999, committed lines of credit agreements totaling approximately $91 million were available to the Bank, of which, $5 million was outstanding at year end. The advance bears interest at 5.03% per annum and matures August 1999. 31 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 12 - 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: 1999 1998 1997 ---------- ---------- ---------- Deferred loan fees $ (117,893) $ (766,610) $ (897,980) Loan loss and general reserves 488,792 85,224 53,984 Deferred compensation (5,066) (5,100) 70,187 Other, net (26,833) (3,514) (51,191) ---------- ---------- ---------- $ 339,000 $ (690,000) $ (825,000) ========== ========== ========== The nature and components of the Company's net deferred tax assets (liabilities), established at an estimated tax rate of 34 percent, are as follows at March 31: 1999 1998 ----------- ----------- Deferred Tax Assets Deferred compensation agreements $ 428,000 $ 435,000 Financial reporting accrued expenses not recognized for tax purposes 276,000 275,000 ----------- ----------- Total deferred assets 704,000 710,000 Deferred Tax Liabilities ----------- ----------- Deferred loan fees for tax purposes in excess of amounts deferred for financial reporting purposes (605,000) (485,000) Tax based loan loss deductions not recognized for financial reporting (798,000) (1,290,000) Tax effect of unrealized gains on available-for-sale securities (1,647,094) (1,615,348) Other deferred tax liabilities (226,380) (199,380) ----------- ----------- Total deferred liabilities (3,276,474) (3,589,728) ----------- ----------- Net deferred tax assets (liabilities) $(2,572,474) $(2,879,728) =========== =========== 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: 1999 1998 1997 ----------- ----------- ----------- Provision for income tax at the statutory rate of 35 percent $ 4,581,312 $ 4,352,787 $ 4,130,040 Increase (decrease) in tax resulting from Income taxed at lower bracket (130,895) (124,365) (118,002) Dividends received deduction (15,129) (18,638) (17,891) Other, net 21,174 4,873 2,546 ----------- ----------- ----------- Income tax provision $ 4,456,462 $ 4,214,657 $ 3,996,693 =========== =========== =========== 32 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 12 - INCOME TAX (Continued) For fiscal years 1996 and 1995, the Company was allowed a bad debt deduction of 8 percent of taxable income, subject to certain limitations. During 1997 a tax law change eliminated this tax deduction, and, in addition, requires the Company to recapture and pay taxes on these deductions taken after fiscal year ended March 31, 1988. The Company has previously recorded deferred tax liabilities to account for this obligation. Therefore, the Company believes retroactive effects of this law change will not be significant. The cumulative tax-basis bad debt deduction as of March 31, 1999 and 1998 was approximately $5,337,000 and $6,404,000, 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. NOTE 13 - 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 expects to complete the steps necessary to terminate the plan in the next fiscal year, at which time all assets of the plan will be 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 December 31, 1999, 1998 and 1997 was as follows: December 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Change in benefit obligation Benefit obligation at beginning of year $ 3,327,085 $ 3,081,040 $ 2,883,175 Service cost 128,064 124,996 128,641 Interest cost 197,091 182,027 170,244 Plan curtailment (823,569) - - Actuarial gain 311,008 42,802 (2,179) Benefits paid 99,947 (103,780) (98,841) Benefit obligation at end of ----------- ----------- ----------- year 3,039,732 3,327,085 3,081,040 ----------- ----------- ----------- Change in plan assets Fair value of plan assets at beginning of year 2,667,341 2,340,028 2,041,493 Actual return on plan assets 380,811 214,496 234,504 Plan contributions 208,321 216,597 162,872 Benefits paid (99,947) (103,780) (98,841) Fair value of plan assets at ----------- ----------- ----------- end of year 3,156,526 2,667,341 2,340,028 ----------- ----------- ----------- Funded status 116,794 (659,744) (741,012) Unrecognized net actuarial loss - 446,484 493,996 Unrecognized transition obligation - (70,882) (89,373) Unrecognized prior service cost - (103,436) (116,801) ----------- ----------- ----------- Prepaid (accrued) benefit cost $ 116,794 $ (387,578) $ (453,190) =========== =========== ========== 33 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 13 - BENEFIT PLANS (Continued) December 31, ---------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Components of net periodic benefit cost: Service cost $ 128,064 $ 124,996 $ 128,641 Interest cost 197,091 182,027 170,244 Expected return on plan assets (160,753) (141,356) (123,847) Recognized net (gain)/loss 11,229 17,174 24,291 Amortization of prior service cost (13,365) (13,365) (13,365) Amortization of transition obligation (18,491) (18,491) (18,491) Recognizition of prior service costs (349,755) - - Recognized (gain)/loss of curtailment (90,071) - - ----------- ----------- ----------- Net periodic benefit cost $ (296,051) $ 150,985 $ 167,473 =========== =========== =========== The weighted average assumptions used were as follows: 1999 1998 1997 ----------- ----------- ----------- Discount rate 5.25 % 6 % 6 % Rate of increase in compensation levels - % 5 % 5 % Expected long-term rate of return on plan assets 6.00 % 6 % 6 % (b) Deferred Compensation Plan - The Company has entered into deferred compensation agreements with certain of its officers. The agreements provide for additional retirement benefits payable over a twelve to seventeen year period following retirement. In connection with these agreements, the Company has acquired life insurance policies on the individual officers covered by the deferred compensation agreements. At March 31, 1999 and 1998, the cash surrender values of these policies included in other assets aggregated $1,796,484 and $1,667,504, respectively. Deferred compensation expense amounted to $72,000, $71,900 and $293,521 in 1999, 1998 and 1997, respectively. (c) Profit Sharing Arrangement - The Company has a profit sharing arrangement with employees meeting certain service requirements. Payments made to employees pursuant to the arrangement are based upon earnings, growth in deposits and attainment of certain corporate objectives. Costs of the arrangement were $351,144, $338,536 and $412,829 for 1999, 1998 and 1997, respectively. (d) 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. The ESOP shares as of March 31 were as follows: 35 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 13 - BENEFIT PLANS (Continued) 1999 1998 1997 ----------- ----------- ----------- Number of shares Allocated shares 13,200 8,600 4,000 Shares released for allocation 4,600 4,600 4,000 Unallocated shares 32,200 36,800 36,000 ----------- ----------- ----------- Total ESOP shares 45,400 45,400 40,000 =========== =========== =========== Fair Value Unallocated shares $ 426,650 $ 687,700 $ 576,000 =========== =========== =========== 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. (e) 401(k) Plan - Effective January 1, 1993, the Company adopted a defined contribution 401(k) retirement and savings plan (the "Plan") covering substantially all employees. The Company contributes 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 $174,463, $125,609 and $118,577 for the years ended March 31, 1999, 1998 and 1997, respectively. NOTE 14 - STOCKHOLDERS' EQUITY (a) Capital Requirements - The Corporation and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines on the regulatory framework for prompt corrective action, the Corporation must meet specific capital adequacy guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require maintenance of minimum amounts and ratios (set forth in the table below 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, 1999, that each entity meets all capital adequacy requirements to which they are subject. As of August 21, 1998, 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. 35 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 14 - STOCKHOLDERS' EQUITY (Continued) To be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- ---------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio --------- --------- ---------- ---------- ----------- ---------- As of March 31, 1999 Total Capital (to Risk Weighted Assets) Greater/less Greater/less Consolidated $ 91,560 27.50% $ 26,640 than 8.00% $ 33,299 than 10.00% Greater/less Greater/less Horizon Bank $ 89,487 26.11% $ 27,420 than 8.00% $ 34,275 than 10.00% Tier I Capital (to Risk Weighted Assets) Greater/less Greater/less Consolidated $ 86,489 25.97% $ 13,320 than 4.00% $ 19,980 than 6.00% Greater/less Greater/less Horizon Bank $ 86,596 25.26% $ 13,710 than 4.00% $ 20,565 than 6.00% Tier I Capital (to Average Assets) Greater/less Greater/less Consolidated $ 86,489 14.62% $ 23,663 than 4.00% $ 29,579 than 5.00% Greater/less Greater/less Horizon Bank $ 86,596 14.64% $ 23,666 than 4.00% $ 29,582 than 5.00%
To be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- ---------------------- ------------------------ Amount Ratio Amount Ratio Amount Ratio --------- --------- ---------- ---------- ----------- ---------- As of March 31, 1998 Total Capital (to Risk Weighted Assets) Greater/less Greater/less Consolidated $ 83,956 28.4% $ 23,601 than 8.0% $ 29,501 than 10.00% Greater/less Greater/less Horizon Bank $ 83,848 28.4% $ 23,599 than 8.0% $ 29,499 than 10.00% Tier I Capital (to Risk Weighted Assets) Greater/less Greater/less Consolidated $ 81,259 27.5% $ 11,800 than 4.0% $ 17,700 than 6.00% Greater/less Greater/less Horizon Bank $ 81,151 27.5% $ 11,799 than 4.0% $ 17,699 than 6.00% Tier I Capital (to Average Assets) Greater/less Greater/less Consolidated $ 81,259 15.3% $ 21,250 than 4.0% $ 26,562 than 5.00% Greater/less Greater/less Horizon Bank $ 81,151 15.3% $ 21,249 than 4.0% $ 26,561 than 5.00%
(b) Holding Company Loans - Under federal regulations, the Bank is limited, unless previously approved, as to the amount it may loan to the holding company and any one affiliate to 10 percent of its capital stock and surplus, and the total of loans to the holding company and affiliates must not exceed 20 percent of capital and surplus. Further, all such loans must be fully collateralized. (c) Dividend Reinvestment Plan - As a service to its stockholders of record, the Bank offers a Dividend Reinvestment and Stock Purchase Plan ("Reinvestment Plan"). Under the terms of the Reinvestment Plan, dividends and optional cash payments may be reinvested toward the purchase of additional shares of stock. No brokerage commission or fees are charged to acquire shares through the Reinvestment Plan. (d) Stock Repurchase Plans - During 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. 36 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 14 - STOCKHOLDERS' EQUITY (Continued) (e) 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 10 years. 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 10 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 1997 and 1998 is estimated at $12,401 and $90,307. he fair value of options issued in 1999 is estimated at $497,788. The following assumptions were used to estimate the fair value of the options: 1999 1998 1997 ------ ------- ------ Risk-free interest rate 5.18 % 5.66 % 6.71 % Dividend yield rate 2.827 % 5.117 % 5.263 % Price volatility 0.2482 .2542 .2227 Weighted average expected life of options 3.65 yr. 3.78 yr. 4.07 yr. Management believes that the assumptions used in the option pricing model are highly subjective and represent only one estimate of possible value, as there is no active market for the options granted. The fair value of the options granted in 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: 1999 1998 1997 ------ ------- ------ Net income as reported $ 8,633,001 $ 8,221,877 $ 7,803,420 Additional compensation for fair value of stock options (294,846) (170,399) (147,823) ----------- ----------- ----------- Pro forma net income $ 8,338,155 $ 8,051,478 $ 7,655,597 =========== =========== =========== Earnings per share Basic As reported $ 1.15 $ 1.ll $ 1.04 ======== ======== ======== Pro forma $ 1.11 $ 1.08 $ 1.02 ======== ======== ======== Diluted As reported $ 1.14 $ 1.09 $ 1.03 ======== ======== ======== Pro forma $ 1.10 $ 1.07 $ 1.01 ======== ======== ======== 37 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 14 - STOCKHOLDERS' EQUITY (Continued) Shares of Common Stock -------------------------- Weighted Average of Available for Under Exercise Price of Option/Award Plan Shares Under Plan ------------ ------------ ------------------ - -- Balance, March 31, 1996 241,272 379,790 Authorized - - Granted (5,750) 5,750 11.685 Exercised - (53,731) 2.983 - 12.648 Lapsed 19,552 (19,552) 2.983 - 12.648 Expired (9,049) - ------------ ------------ Balance, March 31, 1997 246,025 312,257 Authorized - - Granted (25,500) 25,500 18.625 Exercised - (62,369) 6.983 - 12.648 Lapsed 11,252 (11,252) 6.983 - 12.648 Expired (7) - ------------ ------------ Balance, March 31, 1998 231,770 264,136 Authorized - - Granted (156,700) 156,700 12.813 - 13.25 Exercised - (8,764) 6.983 - 12.648 Lapsed 32,514 (32,514) 6.983 - 12.648 Expired (1,164) - ------------ ------------ Balance, March 31, 1999 106,420 379,558 ============ ============ 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 80,412 2.404 years $ 7.77 80,412 $ 7.77 $10 to $15 299,145 8.107 years 11.93 109,421 11.02 At March 31, 1999, 485,977 shares of common stock were reserved for issuance pursuant to stock plans, options and conversions of preferred stock. 38 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 15 - EARNINGS PER SHARE The numerators and denominators of basic and diluted earnings per share are as follows: 1999 1998 1997 ----------- ----------- ----------- Net income (numerator) $ 8,633,001 $ 8,221,877 $ 7,803,420 Shares used in the calculation (denominators) Basic earnings per share weighted average shares outstanding 7,491,280 7,435,782 7,478,666 Effect of dilutive stock options 85,993 108,481 71,688 ----------- ----------- ----------- Diluted shares 7,577,273 7,544,263 7,550,354 =========== =========== =========== Basic earnings per share $ 1.15 $ 1.11 $ 1.04 ======= ======= ======= Diluted earnings per share $ 1.14 $ 1.09 $ 1.03 ======= ======= ======= NOTE 16 - COMMITMENTS AND CONTINGENCIES (a) Employment Agreement - The Company has entered into a four-year employment agreement with the Company's president at an amount approximating his current level of compensation. In the event of specified terminations of the president's employment following a change in control of the Company (as defined), the agreement provides the president with severance payments of up to three times his annual compensation plus continuation of certain benefits. (b) Contingency Reserve - The Company has a contingency reserve of $211,323 recorded to reflect the estimated impairment of value related to pension plan assets invested with Mutual Benefit Life Insurance Company. The Company plans to honor its pension commitments and, after reviewing all of the available information, has reserved approximately 7 percent of the plan's asset values to reflect this commitment. (c) Long-Term Lease Commitments - The Company has entered into lease agreements for three branch offices located in Snohomish County, Washington. Future noncancelable lease payments under these agreements are as follows for the years ending March 31: 2000 $ 80,026 2001 19,936 ----------- $ 99,962 =========== (d) Construction Commitment - The Company entered into a construction contract for approximately $2 million to build a new branch office located in Bellingham, Washington. As of March 31, 1999 the Company had incurred approximately $300,000 of costs related to the construction. NOTE 17 - 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. 39 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 18 - FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk (loan commitments) in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. Loan commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those commitments reflect the extent of the Bank's exposure to credit loss from these commitments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank's experience has been that substantially all loan commitments are drawn upon by customers. Collateral held usually includes single family residential property and income producing commercial properties. The Bank has not incurred any losses on its commitments in 1999, 1998 or 1997. Loan commitments outstanding were $16,237,726 in 1999, $23,467,932 in 1998 and $2,523,820 in 1997. NOTE 19 - 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. 40 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The carrying amounts and estimated fair values of the Bank's financial instruments at March 31, 1999 and 1998 are as follows: 1999 1998 -------------------------- ------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------- ------------ ----------- ---------- - -- Financial Assets Cash and cash equivalents $ 7,781,073 $ 7,781,073 $ 6,878,615 $ 6,878,615 Investment securities 26,041,501 26,081,374 35,799,693 35,861,563 Mortgage-backed securities 54,846,398 55,095,847 48,840,520 49,096,462 Interest-bearing deposits 8,052,381 8,052,381 9,980,349 9,980,349 Federal Home Loan Bank stock 4,563,600 4,563,600 - - Loans receivable 484,544,820 488,642,223 433,697,267 438,828,229 Accrued interest and dividends receivable 3,739,470 3,739,470 3,678,614 3,678,614 Financial Liabilities Demand and savings deposits 136,100,250 136,100,250 117,048,765 117,048,765 Time deposits 345,018,748 347,707,798 333,076,293 334,751,011 Accounts payable and accrued liabilities 5,776,033 5,776,033 7,774,742 7,774,742 Accrued interest payable 148,523 148,523 151,083 151,083 Securities sold under agreements to repurchase 14,800,000 14,787,000 - - Other borrowed funds 5,000,000 4,998,500 - - NOTE 20 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION In Thousands --------------------- 1999 1998 ---------- ---------- Condensed balance sheet at March 31: Cash $ 43 $ 257 Investment in bank 89,794 83,737 Other assets 739 723 -------- -------- $ 90,576 $ 84,717 ======== ======== Other liabilities $ 826 $ 822 Stockholders' equity 89,750 83,895 -------- -------- $ 90,576 $ 84,717 ======== ======== 41 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 20 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (Continued) Condensed statement of income for the years ended March 31, 1999 and 1998: In Thousands ----------------------- 1999 1998 -------- -------- Income Cash dividends from Bank subsidiary $ 2,989 $ 5,742 -------- -------- Expenses Compensation 104 91 Other 264 260 -------- -------- Total expenses 368 351 Income before equity in undistributed -------- -------- income of subsidiary and benefit equivalent to income taxes 2,621 5,391 Benefit equivalent to income taxes 67 89 Income before equity in undistributed -------- -------- income of subsidiary 2,676 5,480 Equity in undistributed income of subsidiary 5,945 2,742 -------- -------- Net income 8,633 8,222 ======== ======== In Thousands ----------------------- 1999 1998 -------- -------- Cash flows from operating activities Net income $ 8,633 $ 8,222 Adjustments to reconcile net income to net cash flows from operating activities Equity in undistributed income of subsidiary (5,945) (2,742) Other operating activities (12) (212) Net cash flows from operating -------- -------- activities 2,688 5,268 Cash flows from financing activities -------- -------- Sale of common stock 612 800 Dividends paid (3,298) (6,197) Repurchase of common stock (204) - -------- -------- Net cash flows from financing activities (2,890) (5,397) -------- -------- Net change in cash (214) (129) Cash, beginning of year 257 386 -------- -------- Cash, end of year $ 43 $ 257 ======== ======== 42 HORIZON FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999, 1998 and 1997 NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Year Ended March 31, 1999 ------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------ ------------ ------------- ------------- Interest income $ 10,609,112 $ 10,665,795 $ 10,974,595 $ 10,953,906 Interest expense 5,754,285 5,856,933 5,886,368 5,778,800 ------------ ------------ ------------- ------------- Net interest income 4,854,827 4,808,862 5,088,227 5,175,106 Provision for loan losses 320,000 - 75,000 - Other income 662,922 456,704 381,327 463,410 Other expenses 1,953,592 2,019,111 2,102,160 2,332,069 Income from continuing ------------ ------------ ------------- ------------- operations before income tax 3,244,157 3,246,455 3,292,394 3,306,447 Federal income tax 1,101,091 1,101,754 1,118,082 1,135,535 ------------ ------------ ------------- ------------- Net income $ 2,143,066 $ 2,144,701 $ 2,174,312 $ 2,170,922 ============ ============ ============= ============= Basic earnings per share (adjusted for stock splits and dividends) $ .29 $ .29 $ .29 $ .29 ====== ====== ====== ====== Diluted earnings per share (adjusted for stock splits and dividends) $ .28 $ .28 $ .29 $ .29 ====== ====== ====== ======
Year Ended March 31, 1998 ------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------ ------------ ------------- ------------- Interest income $ 9,942,613 $ 10,095,188 $ 10,371,826 $ 10,491,287 Interest expense 5,387,132 5,598,327 5,679,271 5,570,670 ------------ ------------ ------------- ------------- Net interest income 4,555,481 4,496,861 4,692,555 4,920,617 Provision for loan losses 30,000 150,000 - 175,000 Other income 282,002 721,811 234,509 452,951 Other expenses 1,795,176 1,972,764 1,788,079 2,009,234 ------------ ------------ ------------- ------------- Income from continuing operations before income tax 3,012,307 3,095,908 3,138,985 3,189,334 Federal income tax 1,021,259 1,047,837 1,065,245 1,080,316 ------------ ------------ ------------- ------------- Net income $ 1,991,048 $ 2,048,071 $ 2,073,740 $ 2,109,018 ============ ============ ============= ============= Basic earnings per share (adjusted for stock splits and dividends) $ .27 $ .28 $ .28 $ .28 Diluted earnings per share ====== ====== ====== ====== (adjusted for stock splits and dividends) $ .26 $ .27 $ .28 $ .28 ====== ====== ====== ======
NOTE 22 - SUBSEQUENT EVENT In January 1999, the Corporation entered into a definitive merger agreement with Bellingham Bancorporation. The merger agreement is subject to approval by various federal and state agencies and the satisfaction of certain contingencies contained in the merger agreement. The merger, if consummated under the proposed terms, would be accounted for as a pooling-of-interests and would result in the Corporation issuing approximately 1.1 million shares of its common stock, including shares issuable upon the exercise of outstanding stock options and warrants. Total assets of Bellingham Bancorporation as of September 30, 1998 and 1997, at its most recent fiscal year ends, were $64 million and $55 million, respectively. Net income for these same periods were $734,000 and $641,000, respectively. 43 "This page left intentionally blank." 44 DIRECTORS AND OFFICERS =============================================================================== DIRECTORS Carla J. Williams V. Lawrence Evans Vice President President & Chief Executive Officer Robert C. Diehl Donald A. Wolf Diehl Ford, Inc., a car dealership. Kelli J. Holz, CPA Vice President Vice President V. Lawrence Evans Theresa A. Aiello President & Chief Executive Officer Richard P. Jacobson Assistant Vice President Horizon Financial Corp. Vice President & Corporate Secretary Donald J. Anderson Gary E. Goodman Karen A. LePage Assistant Vice President Tosco Refinery, Inc., an oil refinery. Vice President Tammy D. Barnett George W. Gust OFFICERS OF Assistant Vice President Chairman of the Board HORIZON BANK Horizon Financial Corp. Marie A. Collings V. Lawrence Evans Assistant Vice President Richard R. Haggen Chairman of the Board Haggen, Inc., a grocery chain. President & Chief Executive Officer David M. Eldred Assistant Vice President Fred R. Miller Richard P. Jacobson Former owner of Skagit Senior Vice President & Nancy A. Graham Bonded Collectors, Inc., Corporate Secretary Assistant Vice Preisent a collection agency. Karla C. Lewis Sandra L. Hain L.M. (Larry) Strengholt Senior Vice President Assistant Vice President Stengholt Construction Co., Inc., a general building contractor Judy E. Boxx Majorie K. LaValley Vice President Assistant Vice President Frank Uhrig Yeagers, Inc., a sporting goods store. Kelli J. Holz, CPA Claudia B. Jonas Vice President Assistant Vice President DIRECTORS EMERITUS Jeffrey Jansen Teresa A. Ledford John H. Dunkak III Vice President Assistant Vice President Robert E. Ebright, DVM Howard E. Mitchell, PH.D. Karen A. LePage Dale R.C. Oliver Morris Tarte Vice President Assistant Vice President A.E. (Al) Williamson Sandra R. Mathewson Carol A. Whelchel OFFICERS OF HORIZON Vice President Assistant Vice President FINANCIAL CORP. Merwyn G. Murk George W. Gust Vice President Chairman of the Board Elizabeth E. (Beth) Sherry Vice President ========================================================================================================= 45
CORPORATE INFORMATION ========================================================================================================= Corporate Headquarters Stockholder Information 40 Wall Street Bellingham & Dividend Reinvestment New York, NY 10005 Cornwall Office David Eldred (800) 278-4353 1500 Cornwall Avenue Assistant Vice President Bellingham, WA 98225 & Investor Relations Manager (360) 733-3050 Horizon Financial Corp. Stock Prices and Dividend Information P.O. Box 580 Horizon Financial Corp.'s common Email & Website Bellingham, WA 98227 stock is traded on The NASDAQ info@horizon-bank.com (360) 733-3050 National Market under the symbol www.horizon-bank.com HRZB. The common stock began trading Annual Meeting on the NASDAQ systems at the time of Subsidiaries Horizon Financial Corp.'s annual meeting Horizon's conversion to stock form in Horizon Bank of stockholders will be at 2 p.m. August 1986. 1500 Cornwall Avenue Tuesday, July 27, 1999 at the Best The following table presents the high Bellingham, WA 98225 Western Lakeway Inn, 714 Lakeway and low prices as reported by the (360) 733-3050 Drive, Bellingham, WA 98226. NASDAQ stock market and dividends paid for the last two fiscal years. Westward Financial Transfer Agent These prices represent quotations by Services Corp. Request for information concerning the dealers and do not necessarily Subsidiary of Horizon transfer requirements, dividend represent actual transactions, and do Bank, payment, lost stock certificates, change not include retail markups, markdowns 1500 Cornwall Avenue of address and other shareholder or commissions. The Corporation has Bellingham, WA 98225 Matters should be directed to: approximately 5,300 stockholders. (360) 733-3050 American Stock Transfer 1999 Fiscal Year Auditors & Trust Company Qtr. High Low Dividend Moss Adams LLP 40 Wall Street ------------------------------------ 114 West Magnolia, New York, NY 10005 4th $15.25 $12.56 $0.11 Suite 301 (800) 937-5449 3rd 14.25 12.00 0.11 Bellingham, WA 98225 2nd 16.50 12.38 0.11 (360) 676-1920 Dividend Reinvestment 1st 18.88 15.25 0.11 As a service to its stockholders of ------------------------------------ Special Counsel record, the Corporation offers a 1998 Fiscal Year John F. Breyer, Jr. Dividend Reinvestment and Stock Qtr. High Low Dividend Breyer & Associates PC Purchase Plan. Under the terms of the ------------------------------------ 110 New York Ave., NW Plan, dividends and optional cash 4th $19.38 $16.25 $0.51 Suite 700-E payments may be reinvested toward the 3rd 18.50 15.75 0.11 Washington, D.C. 20005 purchase of additional shares of stock. 2nd 16.75 14.50 0.11 (202) 737-7900 No brokerage commission or fees are 1st 16.63 11.74 0.10 charged to acquire shares through the ------------------------------------ General Counsel Plan. For a Plan prospectus, or to John S. Ludwigson enroll in the Plan, please contact the Dividend Policy Ludwigson, Thompson, American Stock Transfer & Trust Horizon Financial Corp. historically Hayes & Bell Company Dividend Reinvestment has paid cash dividends on its common 119 N. Commercial Department at the following address: stock. The Corporation must adhere Bellingham, WA 98225 to certain regulatory requirements (360) 734-2000 American Stock Transfer governing the distribution of divi- & Trust Company dends, and there can be no assurance Financial Information Dividend Reinvestment Department that the Corporation will continue to Richard P. Jacobson declare cash dividends in the future. Senior Vice President & Corporate Secretary Horizon Financial Corp. P.O. Box 580 Bellingham, WA 98227 (360) 733-3050
=============================================================================== 46 OFFICE LOCATIONS ========================================================================================================= Anacortes Everett, WA Mount Vernon 1218 Commercial Avenue (425) 353-9410 1503 Riverside Drive Anacortes, WA 98221 Steven Heigert Mount Vernon, WA 98290 (360) 293-4571 Office Manager (360) 424-7022 Claudia Jonas Lucille Collazo Assistant Vice President Ferndale Loan Officer & Office Manager 2045 Main Street Bill Ketcheside Carol Watts Ferndale, WA 98248 Loan Officer Loan Officer (360) 384-1400 John Voth Terry Aiello Customer Service Manager Bellingham/Cornwall Assistant Vice President 1500 Cornwall Avenue & Office Manager Snohomish Bellingham, WA 98225 620 2nd Street (360) 733-3050 Lynden Snohomish, WA 98290 300 Grover Street (360) 568-1522 Bellingham/Meridian Lynden, WA 98264 Teresa Ledford 4110 Meridian (360) 354-5678ce Manager Assistant Vice President Bellingham, WA 98226 Jeffrey Jansen & Office Manager (360) 734-0181 Vice President Carol Whelchel & Office Manager Assistant Vice President Joyce Lemperes & Loan Officer Loan Officer Blaine Mill Creek 400 H Street 13416 Bothell Everett Highway Blaine, WA 98230 Suite 201 (360) 332-8333 Mill Creek, WA 98012 Visit our website Pam Martin (425) 316-6900 Loan Officer Chris Bolyard email: info@horizon-bank.com Carol Dean Office Manager www.horizon-bank.com Customer Service Manager Burlington 1020 South Burlington Blvd.------------------------------------------------------------------------------ Burlington, WA 98233 No Postage (360) 757-3200 Necessary if Tammy Barnett Mailed Assistant Vice Presient ------------------------------- In the & Office Manager BUSINESS REPLY CARD United States Wendy Goodman First Class Permit No. 34 Bellingham, WA Loan Officer ------------------------------- Edmonds Postage will be paid by Addressee 315 5th Avenue South Edmonds, WA 98020 HORIZON BANK (425) 744-1333 INVESTOR RELATIONS Sandra Hain PO BOX 580 Assistant Vice President BELLINGHAM, WA 98227-9855 & Office Manager Everett 909 S.E. Everett Mall Way Suite E-500 =========================== 47
Email us *** Info@horizon-bank.com *** ----------------------------------- Visit our website *** www.horizon-bank.com *** ----------------------------------- - ------------------------------------------------------------ Dividend Reinvestment Information Request - ------------------------------------------------------------ Please send me information regarding 24 Hour Telephone Horizon's Dividend Reinvestment & Stock Purchase Plan. Banking *** Mailing Address 1.888.512.BANK *** Name: ------------------------------------------------------ Address: --------------------------------------------------- City: State: Zip: --------------------- ------------ ---------- Phone: Fax: E-mail: ----------- ------------------ ------------ How are your shares held? [ ] I have physical possession of my stock certificates. [ ] My stock is held by a stock broker or other nominee. [Back cover] [Logo - Horizon Financial Corp.] 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 Consolidated Financial Statements contained in the Annual Report filed as Exhibit 13 hereto and incorporated herein by reference. (b) Wholly-owned subsidiary of Horizon Bank, a savings bank. EXHIBIT 23 CONSENT OF AUDITORS [LETTERHEAD OF MOSS-ADAMS LLP] 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 May 7, 1999 appearing in the 1999 Annual Report to Stockholders of Horizon Financial Corp., which is incorporated by reference in Horizon Financial Corp.'s Annual Report on Form 10-K for the year ended March 31, 1999. /s/MOSS ADAMS LLP Bellingham, Washington June 25, 1999 EX-27 2
9 0001002682 HORIZON FINANCIAL CORP. EXHIBIT 27 YEAR MAR-31-1999 MAR-31-1999 7781073 8052381 0 0 68934171 11953728 12243048 484544820 3956150 602125761 481118998 19800000 11456734 0 0 0 7771327 81978702 602125761 37449922 43203418 0 43203418 22776189 23276386 19927032 395000 329332 8406932 13089463 13089463 0 0 8633001 1.15 1.14 3.66 0 332624 0 0 3611150 395000 0 3956150 2891400 0 1064750
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