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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended June 30, 2002
-------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the transition period from to
------------- -------------
Commission file number 0-27062
Horizon Financial Corp.
-----------------------
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington
------------------------------------
(State or other jurisdiction of incorporation or organization)
91-1695422
----------
(IRS Employer Identification No.)
1500 Cornwall Avenue
Bellingham, Washington
----------------------
(Address of principal executive offices)
98225
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(Zip Code)
Registrant's telephone number including area code: (360) 733-3050
---------------
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
---
As of June 30, 2002, 10,690,871 common shares, as restated for the 25%
stock split declared June 25, 2002, $1.00 par value, were outstanding.
HORIZON FINANCIAL CORP.
INDEX PAGE
- ----- ----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Independent Accountant's Report 3
Consolidated Statements of Financial Condition 4
Consolidated Statements of Income 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES
2
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors and Stockholders'
Horizon Financial Corp.
We have reviewed the accompanying consolidated statements financial condition
of Horizon Financial Corporation and subsidiaries as of June 30, 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for the three months ended June 30, 2002 and 2001. These financial statements
are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial condition of Horizon Financial Corporation and subsidiaries as of
March 31, 2002, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (which is not
presented herein), and in our report dated April 22, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated statement
of financial condition as of March 31, 2002, is fairly presented, in all
material respects, in relation to the consolidated statement of financial
condition from which it has been derived.
/s/ Moss Adams LLP
Bellingham, Washington
August 1, 2002
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
HORIZON FINANCIAL CORP.
Consolidated Statements of Financial Condition
ASSETS
June 30, March 31,
2002 2002
(unaudited)
-------------- --------------
Cash and cash equivalents $ 13,522,514 $ 14,187,040
Interest-bearing deposits 65,171,000 69,775,000
Investment securities
Available-for-sale 66,483,803 46,373,554
Held-to-maturity 369,178 369,140
Mortgage-backed securities
Available-for-sale 32,392,103 29,987,703
Held-to-maturity 3,886,290 4,410,204
Federal Home Loan Bank Stock 6,335,600 6,243,300
Loans receivable 558,482,875 568,303,481
Loans held for sale 2,091,520 3,295,900
Accrued interest and dividends receivable 4,573,106 4,495,360
Bank premises and equipment, net 15,391,411 15,195,049
Real estate owned - 289,429
Other assets 14,137,647 9,137,746
-------------- --------------
TOTAL ASSETS $ 782,837,047 $ 772,062,906
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 638,013,229 $ 628,782,470
Accounts payable and other liabilities 7,840,026 7,955,100
Other borrowed funds 28,801,187 29,120,729
Advances by borrowers for taxes and insurance 398,793 1,439,124
Income tax currently payable 1,714,540 513,509
Net deferred income tax liabilities 2,503,346 2,071,613
Deferred compensation 1,603,270 1,580,770
-------------- --------------
Total liabilities 680,874,391 671,463,315
-------------- --------------
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; 10,690,871 and
8,607,117 issued and outstanding,
respectively 10,690,871 8,607,117
Additional paid-in capital 57,883,797 60,428,238
Retained earnings 28,686,619 27,700,939
Unearned ESOP shares (288,413) (288,413)
Accumulated other comprehensive income 4,989,782 4,151,710
-------------- --------------
Total stockholders' equity 101,962,656 100,599,591
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 782,837,047 $ 772,062,906
============== ==============
(See Notes to Financial Statements)
4
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
3 months ended
June 30,
2002 2001
-------------- --------------
INTEREST INCOME
Interest on loans $ 11,072,655 $ 12,452,158
Investment and mortgage-backed securities 1,445,794 1,574,247
-------------- --------------
Total interest income 12,518,449 14,026,405
-------------- --------------
INTEREST EXPENSE
Interest on deposits 4,957,306 7,391,990
Interest on other borrowings 361,078 360,892
-------------- --------------
Total interest expense 5,318,384 7,752,882
-------------- --------------
Net interest income 7,200,065 6,273,523
PROVISION FOR LOAN LOSSES 300,000 160,000
-------------- --------------
Net interest income after provision for
loan losses 6,900,065 6,113,523
-------------- --------------
NONINTEREST INCOME
Service fees 556,628 592,470
Other 431,769 148,225
Net gain (loss) on sales of loans - servicing
released 404,852 302,656
Net gain (loss) on sales of loans - servicing
retained 63,539 (302,692)
Net gain on sale of investment securities 62,222 118,935
-------------- --------------
Total noninterest income 1,519,010 859,594
-------------- --------------
NONINTEREST EXPENSE
Compensation and employee benefits 2,244,358 1,878,811
Building occupancy 589,527 576,917
Other expenses 867,907 662,994
Data processing 247,626 234,649
Advertising 214,372 174,585
-------------- --------------
Total noninterest expense 4,163,790 3,527,956
-------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAX 4,255,285 3,445,161
PROVISION FOR INCOME TAX 1,401,031 1,166,076
-------------- --------------
NET INCOME $ 2,854,254 $ 2,279,085
============== ==============
BASIC EARNINGS PER SHARE $ .27 $ .21*
============== ==============
DILUTED EARNINGS PER SHARE $ .26 $ .20*
============== ==============
*Restated for 25% stock split declared June 25, 2002.
(See Notes to Financial Statements)
5
HORIZON FINANCIAL CORP.
Consolidated Statements of Stockholders' Equity
3 Months Ended June 30, 2002 and 2001
(unaudited)
Common Stock
---------------------- Additional Unearned Other
Number of Paid-In Retained ESOP Comprehensive
Shares At Par Capital Earnings Shares Income (Loss)
--------- ----------- ----------- ----------- --------- -------------
BALANCE, March 31, 2001 8,861,238 $ 8,861,238 $62,380,016 $23,046,017 $(360,517) $3,982,603
Comprehensive income
Net income - - - 2,279,085 - -
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net of taxes
of $(30,389) - - - - - (58,990)
Total other comprehensive
income - - - - - -
Comprehensive income - - - - - -
Unearned ESOP shares - - - - - -
Cash dividends on common stock
at $.12 per share - - - (1,061,302) - -
15% stock dividend adjustment 424 424 4,251 (4,675) - -
Stock options exercised 4,724 4,724 32,891 - - -
Treasury stock purchased - - - - - -
Retirement of treasury stock (22,200) (22,200) (164,546) (60,380) - -
--------- ---------- ----------- ----------- --------- ----------
BALANCE, June 30, 2001 8,844,186 $8,844,186 $62,252,612 $24,198,745 $(360,517) $3,923,613
========= ========== =========== =========== ========= ==========
BALANCE, March 31, 2002 8,607,117 $8,607,117 $60,428,238 $27,700,939 $(288,413) $4,151,710
Comprehensive income
Net income - - - 2,854,254 - -
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net of taxes
of $431,734 - - - - - 838,072
Total other comprehensive
income - - - - - -
Comprehensive income - - - - - -
Cash dividends on common stock
at $.11 per share - - - (1,176,845) - -
25% stock split 2,138,174 2,138,174 (2,138,174) - - -
Stock options exercised 56,960 56,960 373,662 - - -
Dividend reinvestment plan 8,420 8,420 108,028 - - -
Treasury stock purchased - - - - - -
Retirement of treasury stock (119,800) (119,800) (887,957) (691,729) - -
---------- ----------- ----------- ----------- --------- ----------
BALANCE, June 30, 2002 10,690,871 $10,690,871 $57,883,797 $28,686,619 $(288,413) $4,989,782
========== =========== =========== =========== ========= ==========
Treasury Total
Stock Stockholders' Comprehensive
at Cost Equity Income
-------- ------------- ------------
BALANCE, March 31, 2001 $ - $ 97,909,357
Comprehensive income
Net income - 2,279,085 $ 2,279,085
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net of taxes
of $(30,389) - (58,990) (58,990)
-----------
Total other comprehensive
income - - (58,990)
-----------
Comprehensive income - - $ 2,220,095
===========
Unearned ESOP shares - -
Cash dividends on common stock
at $.12 per share - (1,061,302)
15% stock dividend adjustment - -
Stock options exercised - 37,615
Treasury stock purchased (247,126) (247,126)
Retirement of treasury stock 247,126 -
----------- ------------
BALANCE, June 30, 2001 $ - $ 98,858,639
=========== ============
BALANCE, March 31, 2002 $ - $100,599,591
Comprehensive income
Net income - 2,854,254 $ 2,854,254
Other comprehensive income
Change in unrealized gains
on available-for-sale
securities, net of taxes
of $431,734 - 838,072 838,072
-----------
Total other comprehensive
income - - 838,072
-----------
Comprehensive income - - $ 3,692,326
===========
Cash dividends on common stock
at $.11 per share - (1,176,845)
25% stock split - -
Stock options exercised - 430,622
Dividend reinvestment plan - 116,448
Treasury stock purchased (1,699,486) (1,699,486)
Retirement of treasury stock 1,699,486 -
----------- ------------
BALANCE, June 30, 2002 $ - $101,962,656
=========== ============
(See Notes to Financial Statements)
6
HORIZON FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
3 Months Ended
June 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,854,254 $ 2,279,085
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 282,842 459,623
Stock dividends Federal Home Loan Bank stock (92,300) (93,400)
Provision for loan losses 300,000 160,000
Changes in assets and liabilities
Interest and dividends receivable (77,746) 28,816
Interest payable (25,152) (27,879)
Net change in loans held for sale 1,204,380 (650,415)
Federal income tax (receivable) payable 1,201,031 1,166,076
Other assets (4,999,901) (80,490)
Other liabilities (1,250,760) (467,801)
----------- -----------
Net cash flows from operating activities (603,352) 2,773,615
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in interest-bearing deposits, net 4,604,000 (45,555,000)
Purchases of investment securities - available-
for-sale (19,200,995) (1,000,000)
Proceeds from sales and maturities of
investment securities - available-for-sale - 468,218
Purchases of mortgage-backed securities -
available-for-sale (5,511,034) -
Proceeds from maturities of mortgage-backed
securities - available-for-sale 3,467,146 19,371,605
Proceeds from maturities of mortgage-backed
securities - held-to-maturity 523,914 467,057
Purchase of Federal Home Loan Bank stock - -
Net change in loans 9,495,891 17,507,000
Purchases of bank premises and equipment (454,489) (88,590)
Net change in other real estate owned 289,429 -
----------- -----------
Net cash flows from investing activities (6,786,138) (8,829,710)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 9,230,759 7,829,261
Advances from other borrowed funds - -
Repayments of other borrowed funds (319,542) -
Common stock issued, net 547,070 (144,456)
Cash dividends paid (1,033,837) (924,650)
Treasury stock purchased (1,699,486) (247,126)
----------- -----------
Net cash flows from financing activities 6,724,964 6,513,029
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (664,526) 456,934
CASH AND CASH EQUIVALENTS, beginning of period 14,187,040 11,947,606
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $13,522,514 $12,404,540
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 5,356,972 $ 7,780,761
=========== ===========
Cash paid during the period for income tax $ 200,000 $ -
=========== ===========
(See Notes to Financial Statements)
7
HORIZON FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2002
(unaudited)
NOTE A - Basis of Presentation
- ------------------------------
The consolidated financial statements for the three months ended June 30,
2002, include the accounts of Horizon Financial Corp. (the Corporation),
Horizon Bank (the Bank), and other subsidiaries of the Bank. Significant
intercompany balances and transactions have been eliminated in consolidation.
The Corporation has engaged in no significant activity other than holding the
stock of the Bank.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements. Changes in these estimates and assumptions are
considered reasonably possible and may have a material impact on the financial
statements and thus actual results could differ from the amounts reported and
disclosed herein.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation are reflected in the interim financial
statements. The results of operations for the periods ended June 30, 2002 and
2001 are not necessarily indicative of the operating results for the full
year. For further information, refer to the consolidated financial statements
and footnotes thereto in the Horizon Financial Corp. annual report for the
year ended March 31, 2002.
NOTE B - Reclassification
- -------------------------
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
NOTE C - Net Income Per Share
- -----------------------------
Basic earnings per share for the three months ended June 30, 2002 and
2001 are calculated on the basis of 10,742,299 and 11,071,587 weighted average
shares outstanding. Diluted earnings per share for the three months ended June
30, 2002 and 2001 are calculated on the basis of 10,915,843 and 11,187,119
weighted average share outstanding, respectively. Diluted EPS figures are
computed by determining the number of additional shares that are deemed
outstanding due to stock options and warrants under the treasury stock method.
All numbers have been restated to reflect the 25% stock split declared June
25, 2002.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and its
subsidiary. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes contained herein.
Forward Looking Statements
- --------------------------
Management's Discussion and Analysis and other portions of this report
contain certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing Horizon Financial to the protections of such safe harbor
provisions of said Act with respect to all "forward looking statements."
Horizon Financial has used "forward looking statements" to describe future
plans and strategies, including expectations of Horizon Financial's potential
future financial results. Management's ability to predict results or the
effect of future plans and strategies is inherently uncertain. Factors that
could affect results include, but are not limited to: the future level of
interest rates, industry trends, general economic conditions, loan delinquency
rates, and changes in state and federal regulations. These factors should be
considered when evaluating the "forward looking statements" and undue reliance
should not be placed on such statements.
General
- -------
Horizon Financial was formed under Washington law on May 22, 1995, and
became the holding company for Horizon Bank, effective October 13, 1995.
Effective June 19, 1999 the Corporation completed the acquisition of
Bellingham Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham,
was merged with and into Horizon Bank. At June 30, 2002, the Corporation had
total assets of $782.8 million, total deposits of $638.0 million and total
equity of $101.9 million. The Corporation's business activities generally are
limited to passive investment activities and oversight of its investment in
the Bank. Accordingly, the information set forth herein, including the
consolidated financial statements and related data, relates primarily to the
Bank and its subsidiary.
The Bank was organized in 1922 as a Washington State chartered mutual
savings and loan association and converted to a federal mutual savings and
loan association in 1934. In 1979, the Bank converted to a Washington State
chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC"). On August 12, 1986, the Bank
converted to a state chartered stock savings bank under the name "Horizon
Bank, a savings bank". The Bank became a member of the Federal Home Loan Bank
("FHLB") of Seattle in December 1998. Effective March 1, 2000, the Bank
changed its name to its current title, "Horizon Bank".
The Bank's operations are conducted through 15 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington. The acquisition of Bellingham Bancorporation increased Horizon
Financial's and Horizon Bank's presence in Whatcom County. During fiscal
2000, the Bank opened an additional office in Whatcom County, located in the
Barkley Village area of Bellingham, in the northeast portion of the city. In
addition to serving the growing population in this area, this serves as an
operation center to support additional growth for the
9
Corporation. The Bank also completed construction of a new office building at
Murphy's Corner near Mill Creek, which replaced the Bank's leased location in
that area. During fiscal 2000, the Bank purchased a bank site in Marysville,
which will provide potential additional growth opportunities. In Fiscal 2002,
the Bank acquired a bank site in Lynnwood, Washington. The Bank is currently
working on remodeling and upgrading this building, and anticipates opening for
business in the fall of 2002.
At its October 24, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 1,121,250 shares, as restated) of the
Corporation's outstanding Common Stock over a 24 month period. During the
quarter ended June 30, 2002, the Corporation repurchased 149,750 shares of its
Common Stock, as restated, compared to the repurchase of 27,750 of Common
Stock, as restated, during the quarter ended June 30, 2001. In total, the
Corporation had repurchased 704,159 shares, as restated, under this plan, as
of June 30, 2002.
Operating Strategy
- ------------------
The primary business of the Bank is to acquire funds in the form of
deposits and wholesale funds, and to use the funds to make consumer, real
estate and commercial loans in the Bank's primary market area. In addition,
the Bank invests in U.S. Government and federal agency obligations,
mortgage-backed securities, equity securities, and municipal securities. The
Bank intends to continue to fund its assets primarily with retail deposits,
although FHLB advances, and other wholesale borrowings, may be used as a
supplemental source of funds.
The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings.
Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Bank's
profitability is also affected by the level of other income and expenses.
Other income includes income associated with the origination and sale of
mortgage loans, loan servicing fees and net gains and losses on sales of
interest-earning assets. Other expenses include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses and other operating costs. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to commercial lending,
home mortgage lending, consumer lending, small business lending and providing
quality financial services to local personal and business customers. The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities; (ii) continued efforts towards the origination of residential
mortgage loans, including one- to- four family residential construction loans;
(iii) providing high quality, personalized financial services to individuals
and business customers and communities served by its branch network; (iv)
selling fixed rate mortgages to the secondary market; (v) focusing on asset
quality; (vi) containing operating expenses; and (vii) maintaining capital in
excess of regulatory requirements combined with prudent growth.
10
Financial Condition
- -------------------
Total consolidated assets for the Corporation as of June 30, 2002, were
$782,837,047, a slight increase from the March 31, 2002, level of
$772,062,906. This increase in assets was due primarily to the growth in
available for sale investment securities, which increased 43.37% to
$66,483,803 from $46,373,554 at March 31, 2002.
Total liabilities also increased slightly to $680,874,391 at June 30,
2002, from $671,463,315 at March 31, 2002. This increase in liabilities was
due in large part to the growth in deposits, which increased 1.47% to
$638,013,229 from $628,782,470 at March 31, 2002.
Shareholder equity at June 30, 2002 increased 1.35% to $101,962,656 from
$100,599,591 at March 31, 2002. This increase was due primarily to the
increase in net income of $2,854,254 less dividends paid and shares
repurchased. The Corporation remains strong in terms of its capital position,
with a shareholder equity-to-assets ratio of 13.02% at June 30, 2002, compared
to 13.03% at March 31, 2002.
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 June 30, 2002, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $100,086,574.
As of June 30, 2002, the total book value of investments and
mortgage-backed securities was $160,742,099 compared to a market value of
$168,552,838 with an unrealized gain of $7,810,739. As of March 31, 2002 the
total book value of investments and mortgage-backed securities was
$144,625,129, compared to a market value of $151,111,830 with an unrealized
gain of $6,486,701. 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,
borrowings, and cash received from the maturity or sale of investment
securities. The Bank's liquidity fluctuates with the supply of funds and
management believes that the current level of liquidity is adequate at this
time. If additional liquidity is needed, the Bank's options include, but are
not necessarily limited to: 1) Selling additional loans in the secondary
market; 2) Entering into reverse repurchase agreements; 3) Borrowing from the
FHLB of Seattle; 4) Accepting additional jumbo and/or public funds deposits;
or 5) Accessing the discount window of the Federal Reserve Bank of San
Francisco.
Shareholder's equity as of June 30, 2002 was $101,962,656, or 13.02% of
assets, compared to $100,599,591, or13.03% of assets at March 31, 2002. The
Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well capitalized. The Bank's total
risk-adjusted capital ratio as of June 30, 2002 was 20.16%, compared to 20.26%
as of March 31, 2002. These figures are well above the well-capitalized
minimum of 10% required by the FDIC.
The Corporation has been in various buy-back programs since August 1996.
At its October 24, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 1,121,250 shares, as restated) of the
Corporation's outstanding Common Stock over a 24 month period. During
11
the quarter ended June 30, 2002, the Corporation repurchased 149,750 shares of
its common stock at an average price of $11.35 per share, as restated,
compared to the repurchase of 27,750 shares of Common Stock at an average
price of $8.91 per share, as restated, during the quarter ended June 30, 2001.
In total, the Corporation had repurchased 704,159 shares under this plan at an
average price of $9.66, as restated, as of June 30, 2002.
Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock contributes to the overall growth of
shareholder value. The number of shares of stock that will be repurchased
and the price that will be paid is the result of many factors, several of
which are outside of the control of the Corporation. The primary factors,
however, are market and economic factors such as the price at which the stock
is trading in the market, the number of shares available in the market; the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment; the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the Bank's
and the Corporation's liquidity and capital needs and regulatory requirements.
Presently, it is management's belief that purchases made under the current
Board approved plan will not materially affect the Bank's capital or liquidity
position.
12
Comparative Results of Operations
For the Three Months Ended
June 30, 2002 and 2001
Net Interest Income
- -------------------
Net interest income for the three months ended June 30, 2002, increased
14.77% to $7,200,065 from $6,273,523 in the same time period of the previous
year. Interest on loans for the quarter ended June 30, 2002, decreased 11.08%
to $11,072,655, from $12,452,158. This decrease was due primarily to the
decrease in loans receivable resulting from the sale of mortgage loans in the
secondary market. Interest and dividends on investments and mortgage-backed
securities decreased 8.16% to 1,445,794, from $1,574,247 for the comparable
quarter a year ago. This decrease is due in part to he decline in short term
interest rates. Total interest income decreased 10.75% to $12,518,449 from
14,026,405 due to the reasons stated above.
Total interest paid on deposits decreased 32.94% to $4,957,306 from
$7,391,990. This decrease in interest expense is due to an overall decline in
interest rates. Interest on borrowings was little changed at $361,078 during
the quarter, compared to $360,892 for the comparable period one year ago.
During the quarter ended June 30, 2002, the Bank continued to carry wholesale
borrowings in order to further leverage its balance sheet and better manage
its interest rate risk profile.
Provision for losses on loans
- -----------------------------
Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for known and inherent risks in the loan portfolio, based on
management's continuing analysis of factors underlying the quality of the loan
portfolio. These factors include changes in portfolio size and composition,
actual loss experience, current 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 provision for loan losses was $300,000 for the quarter ended June 30,
2002 compared to $160,000 for the quarter ended June 30, 2001. This increase
resulted from management's ongoing analysis of changes in loan portfolio
composition by collateral categories, overall credit quality of the portfolio,
peer group analysis, and current economic conditions. The reserve for loan
losses was $6,146,517, or 1.10% of loans receivable at June 30, 2002, compared
to $5,129,059, or .88% of loans receivable at June 30, 2001. The increased
allowance level resulted from continued loan portfolio growth in the
higher-risk lending categories of commercial and multi-family construction/
permanent loans and business loans during the period, which comprised $254.5
million, or 45.6% of the portfolio at June 30, 2002, versus $204.7 million, or
35.3% at June 30, 2001. In addition, commercial and multi-family loans have
larger individual loan amounts, which have a greater single impact on the
total portfolio quality in the event of delinquency or default. The Bank
considers these reserve levels to be appropriate, due to the uncertain
regional economic environment. Northwest Washington's economy has been
adversely affected by a number of factors, including but not limited to
slowdowns in the aerospace, technology, and telecommunications industries. In
addition, other local industries have been adversely affected by significantly
higher expenses for electricity.
As of June 30, 2002, there were 9 loans in the Bank's portfolio over 90
days delinquent with balances totaling $450,634, which represented .06% of
total assets.
13
Non Interest Income
- -------------------
Non interest income for the three months ended June 30, 2002, increased
76.71% to $1,519,010 from $859,594 for the same time period a year ago.
Service fee income decreased 6.05% to $556,628 from $592,470. The net
gain/loss on the sale of loans servicing released showed a gain of $404,852 in
the current quarter, compared to $302,656 in the comparable period one year
ago. In February of 2001, the Bank began selling many of its new long-term
fixed rate mortgages into the secondary market on a servicing released basis.
Separately, the net gain/loss on the sale of loans on a servicing retained
basis (loans sold from the Bank's portfolio) showed a gain of $63,539 during
the quarter, compared to a loss of $302,692 in the comparable period one year
ago. 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 was the case during the
quarter ended June 30, 2001.
The net gain/loss on sales of investment securities decreased to $62,222
for the quarter ended June 30, 2002 from $118,935 for the comparable period
one year ago. These gains in these periods were due primarily to the sale of
selected common stocks and mortgage backed securities from the Bank's
investment portfolio. Other non-interest income for the quarter increased
191.29% to $431,769 from $148,225. The primary reason for the increase in
fiscal 2003 is the recognition of income related to approximately $10.0
million in bank-owned life insurance which was acquired in late March/early
April 2002. Also contributing to this increase was the recognition of
approximately $40,000 gain on the sale of real estate owned in April 2002.
Non Interest Expense
- --------------------
Non interest expense for the three months ended June 30, 2002, increased
18.02% to $4,163,790 from $3,527,956. Compensation and employee benefits
increased 19.46% for the quarter ended June 30, 2002, to $2,244,358 from
$1,878,811. The increase in compensation and employee benefits during the
quarter ended June 30, 2002 was primarily due to the overall growth in
employment at the Bank, including key additions to staff as the Bank continues
its efforts to enhance its commercial banking expertise. Building occupancy
for the quarter ended June 30, 2002 increased slightly to $589,527 from
$576,917. Data processing expenses increased 5.53% to $247,626 from $234,649.
This increase over the prior period is attributable to the overall growth of
the Bank. Advertising expenses for the quarter ended June 30, 2002 increased
22.79% to $214,372 from $174,585. The increase in fiscal 2003 was due
primarily to the bank's additional marketing efforts to communicate its
expanded commercial product lines and services, the transition to a new
advertising and marketing agency, and the development of a new brand strategy
for the Bank. Other non-interest expenses increased 30.91% to $867,907 from
$662,994 due to the overall growth of the bank, and various expenses related
to the creation and implementation of the Horizon Bank brand.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation continues to be exposed to interest rate risk.
Currently, the Corporation's assets and liabilities are not materially exposed
to foreign currency or commodity price risk. At June 30, 2002, the
Corporation had no off-balance sheet derivative financial instruments, nor did
it have a trading portfolio of investments. At June 30, 2002, there were no
material changes in the Corporation's market risk from the information
provided in the Form 10-K for the fiscal year ended March 31, 2002.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Horizon Financial Corporation has certain litigation and/or
negotiations in progress resulting from activities arising from
normal operations. In the opinion of management, none of these
matters is likely to have a materially adverse effect on the
Corporation's financial position or results of operation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) 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))
(10.5) Bank of Bellingham 1993 Employee Stock Option Plan
(incorporated by reference to Exhibit 99 to the
Registrant's Registration Statement on Form S-8 (File No.
33-88571))
(10.6) Severance Agreement with Dennis C. Joines (incorporated
by reference to the Registrant's Annual Report on Form
10-K for the year ended March 31, 2002)
(10.7) Severance Agreement with Richard P. Jacobson
(10.8) Severance Agreement with Steven L. Hoekstra
(15) Awareness Letter from Accountants
(b) Reports on Form 8-K:
-------------------
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORIZON FINANCIAL CORP.
By: /s/V. Lawrence Evans
----------------------------------------
V. Lawrence Evans
President and Chief Executive Officer
By: /s/Richard P. Jacobson
----------------------------------------
Richard P. Jacobson
Chief Financial Officer
Dated: August 14, 2002
16
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF HORIZON FINANCIAL CORP.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-Q, that:
* the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
* the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ V. Lawrence Evans /s/ Richard P. Jacobson
- --------------------------------- ---------------------------------
V. Lawrence Evans Richard P. Jacobson
Chief Executive Officer Chief Financial Officer
Dated: August 14, 2002
Exhibit 10.7
Severance Agreement with Richard P. Jacobson
CHANGE OF CONTROL /SEVERANCE AGREEMENT
THIS CHANGE OF CONTROL/ SEVERANCE AGREEMENT (the "Agreement") is made and
entered into as of this 16th day of July, 2002 (the "Commencement Date"), by
and between HORIZON BANK, a savings bank chartered under the laws of the State
of Washington (the "Bank"), and Richard P. Jacobson (the "Executive").
WHEREAS, the Executive is currently serving as Executive Vice President
and Chief Finance Officer; and has agreed to continue to serve in the employ
of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes the substantial
contribution the Executive has made to the Bank and wishes to provide
Executive with certain benefits for the period provided in this Agreement in
the event of a change of control (as defined herein) of the Bank or of its
holding company, Horizon Financial Corp. (the "Holding Company");
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, the parties hereto agree as
follows:
1. Certain Definitions.
-------------------
(a) The term "Change of Control" means: (i) an event of a nature
that would be required to be reported in response to Item 1(a) of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
(ii) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, other than the Holding Company, any Consolidated Subsidiaries
(as hereinafter defined), is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the
Bank or the Holding Company representing 25% or more of the combined voting
power of the Bank's or Holding Company's outstanding securities; (iii)
individuals who are members of the Board of Directors of the Holding Company
(the "Board") on the Commencement Date (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the Commencement Date whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an
Incumbent Board or who was appointed as a result of a change at the direction
of the Federal Reserve Board or the Federal Deposit Insurance Corporation
("FDIC"), shall be considered a member of the Incumbent Board; (iv) the
stockholders of the Holding Company approve a merger, consolidation or
acquisition of the Holding Company or the Bank, with or by any other
corporation or entity, other than (1) a merger, consolidation or acquisition
which would result in the voting securities of the Holding Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Holding Company or such surviving entity outstanding immediately after
such merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Holding Company or the Bank (or similar
transaction) in which no person (as hereinabove defined) acquires more than
25% of the combined voting power of the Holding Company's then outstanding
securities; or (v) the stockholders of the Holding Company approve a plan of
complete liquidation of the Holding Company or the Bank or an agreement for
the sale or disposition by the Holding Company of all or substantially all of
the Holding Company's or the
Bank's assets (or any transaction having a similar effect); provided that the
term "Change of Control" shall not include an acquisition of securities by an
employee benefit plan of the Bank or the Holding Company or a change in the
composition of the Board at the direction of the Federal Reserve Board or the
FDIC. Upon a Change of Control, the provisions hereof shall become
immediately operative.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Holding Company that are part of the affiliated group (as
defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), without regard to subsection (b) thereof) that includes the Bank.
(c) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including (without limitation) any of the following circumstances:
(i) a requirement that the Executive be based at any location not
within 30 miles of the Executive's then existing job location,
providing that such new location is not closer to Executive's
home;
(ii) a material demotion, or loss of title or loss of significant
authority of the Executive;
(iii) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits or vacation,
other than as part of an overall program applied uniformly and
with equitable effect to all members of the senior management
of the Bank;
(iv) a successor bank or company fails or refuses to assume the
Bank's obligations Under this Agreement, as required in
Section 4(a) hereof; or
(v) any purported termination of the Executive's employment,
except for Termination for Cause that is not effected pursuant
to a Notice of Termination satisfying the requirements of
Section 6 hereof (and, if applicable, the requirements of
Section 1(d) hereof), which termination shall not be effective
for purposes of this Agreement.
(d) The term "Termination for Cause" means termination of the
employment of the Executive because of the Executive's personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties,
insubordination, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement or any other agreement
between Executive and the Bank or the Holding Company. The Executive shall
not be entitled to any payment or benefit hereunder in the event a termination
occurs by reason of a voluntary retirement, voluntary termination other than
for reasons specified in Section 1(c) hereof, disability, or Termination for
Cause.
2. Term of the Agreement.
---------------------
(a) The term of this Agreement shall be a period of thirty-six
calendar months beginning on the Commencement Date. Commencing on the first
anniversary date of this Agreement and continuing on each anniversary
thereafter, the term of the Agreement shall be extended for a period of one
year in addition to the remaining term, unless either party elects not to
extend this Agreement further by giving written notice thereof to the other
party, subject to earlier termination, as provided herein.
2
(b) Nothing in this Agreement shall be deemed to prohibit the Bank
at any time from terminating the Executive's employment during the term of
this Agreement with or without notice for any reason; provided, however, that
the relative rights and obligations of the Bank and the Executive in the event
of any such termination shall be determined under this Agreement.
3. Severance Benefits.
------------------
(a) If after a Change of Control, the Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate employment with the Bank for Good Reason within twelve (12)
months following a Change of Control, the Bank shall: (i) pay the Executive
(or in the event of Executive's subsequent death, Executive's beneficiary or
estate, as the case may be), as severance pay, a sum equal to 1.99 times
Executive's annual compensation. For purposes of this Agreement, "annual
compensation" shall mean all wages, salary, bonus, and other compensation, if
any, paid by the Bank as consideration for the Executive's services during the
twelve (12) month period ending on the last day of the month preceding the
effective date of a Change of Control which is or would be includable in the
gross income of the Executive receiving the same for federal income tax
purposes. Such amount shall be paid to Executive in a lump sum no later than
sixty (60) days after the date of Executive's termination; and (ii) cause to
be continued for twelve (12) months after the effective date of a Change of
Control, life, medical, dental, and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
the Executive prior to the effective date of a Change of Control, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees on a nondiscriminatory basis.
(b) Notwithstanding the provisions of Section 3(a) above, if a
payment to the Executive who is a "disqualified individual" shall be in an
amount which includes an "excess parachute payment," the payment hereunder to
the Executive shall be reduced to the maximum amount which does not include an
"excess parachute payment." The terms "disqualified individual" and "excess
parachute payment" shall have the meaning defined in Section 280G of the Code.
(c) The Executive shall not be required to mitigate the amount of
any payment or benefit provided for in Section 3(a) of this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in Section 3(a) of this Agreement be reduced by any
compensation earned or benefit received by the Executive as the result of
employment by another employer. This Agreement shall not be construed as a
contract of employment or as providing the Executive any right to be retained
in the employ of the Holding Company or the Bank or any affiliate thereof.
4. Assignment.
----------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank shall require any successor or assignee of
(whether direct or indirect, by purchase, merger, consolidation, operation of
law or otherwise) to all or substantially all of the business and/or assets of
the Bank, to expressly assume and agree to perform the Bank's obligations
under this Agreement.
3
(b) This Agreement shall be binding upon and inure to the benefit
of the Executive, Bank, and Holding Company, and their respective successors
and assigns.
5. Required Regulatory Provisions. Any payments made to Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
compliance with 12 U.S.C. Section 1828(k) and any rules and regulations
promulgated thereunder, including 12 C.F.R. Part 359.
6. Delivery of Notices.
-------------------
For the purposes of this Agreement, all notices and other communications
to any party hereto shall be in writing and shall be deemed to have been duly
given when delivered or sent by certified mail, return receipt requested,
postage prepaid, to the party's address identified herein. Any purported
termination by the Bank or the Executive in connection with a Change of
Control shall be communicated by a Notice of Termination to the other party.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which indicates the specific termination provision in this Agreement
and shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for the termination of Executive's employment under the
provision so indicated.
7. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.
8. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
9. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
11. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by binding
arbitration, conducted before a panel of three arbitrators in a location
selected by the Executive within 50 miles of the location of the Bank, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrators' award in any court having
jurisdiction.
12. Reimbursement of Fees. All reasonable legal fees and expenses paid
or incurred by Executive pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the Bank if
Executive is successful on the merits pursuant to an arbitration award or
legal judgment.
4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH
MAY BE ENFORCED BY THE PARTIES.
Attest: HORIZON BANK
/s/Barbara Brown /s/V. Lawrence Evans
- ------------------------------- ------------------------------------
By: V. Lawrence Evans
---------------------------------
Its: Chairman
--------------------------------
Address: 1500 Cornwall Avenue
----------------------------
Bellingham, WA 98225
----------------------------
EXECUTIVE
/s/Richard P. Jacobson
------------------------------------
Address: 1500 Cornwall Avenue
----------------------------
Bellingham, WA 98225
----------------------------
5
Exhibit 10.8
Severance Agreement with Steven L. Hoekstra
CHANGE OF CONTROL /SEVERANCE AGREEMENT
THIS CHANGE OF CONTROL/ SEVERANCE AGREEMENT (the "Agreement") is made and
entered into as of this 16th day of July, 2002 (the "Commencement Date"), by
and between HORIZON BANK, a savings bank chartered under the laws of the State
of Washington (the "Bank"), and Steven L. Hoekstra (the "Executive").
WHEREAS, the Executive is currently serving as Executive Vice President
and Commercial Loan Manager, and has agreed to continue to serve in the
employ of the Bank; and
WHEREAS, the Board of Directors of the Bank recognizes the substantial
contribution the Executive has made to the Bank and wishes to provide
Executive with certain benefits for the period provided in this Agreement in
the event of a change of control (as defined herein) of the Bank or of its
holding company, Horizon Financial Corp. (the "Holding Company");
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, the parties hereto agree as
follows:
1. Certain Definitions.
-------------------
(a) The term "Change of Control" means: (i) an event of a nature
that would be required to be reported in response to Item 1(a) of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
(ii) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, other than the Holding Company, any Consolidated Subsidiaries
(as hereinafter defined), is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the
Bank or the Holding Company representing 25% or more of the combined voting
power of the Bank's or Holding Company's outstanding securities; (iii)
individuals who are members of the Board of Directors of the Holding Company
(the "Board") on the Commencement Date (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the Commencement Date whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an
Incumbent Board or who was appointed as a result of a change at the direction
of the Federal Reserve Board or the Federal Deposit Insurance Corporation
("FDIC"), shall be considered a member of the Incumbent Board; (iv) the
stockholders of the Holding Company approve a merger, consolidation or
acquisition of the Holding Company or the Bank, with or by any other
corporation or entity, other than (1) a merger, consolidation or acquisition
which would result in the voting securities of the Holding Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Holding Company or such surviving entity outstanding immediately after
such merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Holding Company or the Bank (or similar
transaction) in which no person (as hereinabove defined) acquires more than
25% of the combined voting power of the Holding Company's then outstanding
securities; or (v) the stockholders of the Holding Company approve a plan of
complete liquidation of the Holding Company or the Bank or an agreement for
the sale or disposition by the Holding Company of all or substantially all of
the Holding Company's or the
Bank's assets (or any transaction having a similar effect); provided that the
term "Change of Control" shall not include an acquisition of securities by an
employee benefit plan of the Bank or the Holding Company or a change in the
composition of the Board at the direction of the Federal Reserve Board or the
FDIC. Upon a Change of Control, the provisions hereof shall become
immediately operative.
(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Holding Company that are part of the affiliated group (as
defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), without regard to subsection (b) thereof) that includes the Bank.
(c) The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including (without limitation) any of the following circumstances:
(i) a requirement that the Executive be based at any location not
within 30 miles of the Executive's then existing job location,
providing that such new location is not closer to Executive's
home;
(ii) a material demotion, or loss of title or loss of significant
authority of the Executive;
(iii) a reduction in the Executive's salary or a material adverse
change in the Executive's perquisites, benefits or vacation,
other than as part of an overall program applied uniformly and
with equitable effect to all members of the senior management
of the Bank;
(iv) a successor bank or company fails or refuses to assume the
Bank's obligations under this Agreement, as required in
Section 4(a) hereof; or
(v) any purported termination of the Executive's employment,
except for Termination for Cause that is not effected pursuant
to a Notice of Termination satisfying the requirements of
Section 6 hereof (and, if applicable, the requirements of
Section 1(d) hereof), which termination shall not be effective
for purposes of this Agreement.
(d) The term "Termination for Cause" means termination of the
employment of the Executive because of the Executive's personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties,
insubordination, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement or any other agreement
between Executive and the Bank or the Holding Company. The Executive shall
not be entitled to any payment or benefit hereunder in the event a termination
occurs by reason of a voluntary retirement, voluntary termination other than
for reasons specified in Section 1(c) hereof, disability, or Termination for
Cause.
2. Term of the Agreement.
---------------------
(a) The term of this Agreement shall be a period of thirty-six
calendar months beginning on the Commencement Date. Commencing on the first
anniversary date of this Agreement and continuing on each anniversary
thereafter, the term of the Agreement shall be extended for a period of one
year in addition to the remaining term, unless either party elects not to
extend this Agreement further by giving written notice thereof to the other
party, subject to earlier termination, as provided herein.
2
(b) Nothing in this Agreement shall be deemed to prohibit the Bank
at any time from terminating the Executive's employment during the term of
this Agreement with or without notice for any reason; provided, however, that
the relative rights and obligations of the Bank and the Executive in the event
of any such termination shall be determined under this Agreement.
3. Severance Benefits.
------------------
(a) If after a Change of Control, the Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate employment with the Bank for Good Reason within twelve (12)
months following a Change of Control, the Bank shall: (i) pay the Executive
(or in the event of Executive's subsequent death, Executive's beneficiary or
estate, as the case may be), as severance pay, a sum equal to 1.99 times
Executive's annual compensation. For purposes of this Agreement, "annual
compensation" shall mean all wages, salary, bonus, and other compensation, if
any, paid by the Bank as consideration for the Executive's services during the
twelve (12) month period ending on the last day of the month preceding the
effective date of a Change of Control which is or would be includable in the
gross income of the Executive receiving the same for federal income tax
purposes. Such amount shall be paid to Executive in a lump sum no later than
sixty (60) days after the date of Executive's termination; and (ii) cause to
be continued for twelve (12) months after the effective date of a Change of
Control, life, medical, dental, and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
the Executive prior to the effective date of a Change of Control, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees on a nondiscriminatory basis.
(b) Notwithstanding the provisions of Section 3(a) above, if a
payment to the Executive who is a "disqualified individual" shall be in an
amount which includes an "excess parachute payment," the payment hereunder to
the Executive shall be reduced to the maximum amount which does not include an
"excess parachute payment." The terms "disqualified individual" and "excess
parachute payment" shall have the meaning defined in Section 280G of the Code.
(c) The Executive shall not be required to mitigate the amount of
any payment or benefit provided for in Section 3(a) of this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in Section 3(a) of this Agreement be reduced by any
compensation earned or benefit received by the Executive as the result of
employment by another employer. This Agreement shall not be construed as a
contract of employment or as providing the Executive any right to be retained
in the employ of the Holding Company or the Bank or any affiliate thereof.
4. Assignment.
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(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank shall require any successor or assignee of
(whether direct or indirect, by purchase, merger, consolidation, operation of
law or otherwise) to all or substantially all of the business and/or assets of
the Bank, to expressly assume and agree to perform the Bank's obligations
under this Agreement.
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(b) This Agreement shall be binding upon and inure to the benefit
of the Executive, Bank, and Holding Company, and their respective successors
and assigns.
5. Required Regulatory Provisions. Any payments made to Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
compliance with 12 U.S.C. Section 1828(k) and any rules and regulations
promulgated thereunder, including 12 C.F.R. Part 359.
6. Delivery of Notices.
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For the purposes of this Agreement, all notices and other communications
to any party hereto shall be in writing and shall be deemed to have been duly
given when delivered or sent by certified mail, return receipt requested,
postage prepaid, to the party's address identified herein. Any purported
termination by the Bank or the Executive in connection with a Change of
Control shall be communicated by a Notice of Termination to the other party.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which indicates the specific termination provision in this Agreement
and shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for the termination of Executive's employment under the
provision so indicated.
7. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.
8. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
9. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
11. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by binding
arbitration, conducted before a panel of three arbitrators in a location
selected by the Executive within 50 miles of the location of the Bank, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrators' award in any court having
jurisdiction.
12. Reimbursement of Fees. All reasonable legal fees and expenses paid
or incurred by Executive pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the Bank if
Executive is successful on the merits pursuant to an arbitration award or
legal judgment.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: HORIZON BANK
/s/Barbara Brown /s/V. Lawrence Evans
- ------------------------------- ------------------------------------
By: V. Lawrence Evans
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Its: Chairman
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Address: 1500 Cornwall Avenue
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Bellingham, WA 98225
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EXECUTIVE
/s/Steven L. Hoekstra
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Address: 1500 Cornwall Avenue
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Bellingham, WA 98225
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Exhibit 15
Awareness Letter from Accountants