UNITED STATES
                      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 September 30, 2006
                                             ------------------
                                      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)

                                 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
                                    -----
                                  (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
                                    -----    -----

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of "accelerated
filer and large accelerated file" in Rule 12b-2 of the Exchange Act (Check
one):

Large accelerated file ___  Accelerated filer _X__  Non-accelerated filer ___


Indicate by check mark whether the registrant is a shell corporation (as
defined in Rule 12b-2 of the Exchange Act).

                                 YES      NO   X
                                    -----    -----

As of November 1, 2006, 12,268,852 common shares, $1.00 par value, were
outstanding.

<PAGE>



                             HORIZON FINANCIAL CORP.

INDEX                                                                  PAGE
-----                                                                  ----

PART 1         FINANCIAL INFORMATION

Item 1         Financial Statements

               Consolidated Statements of Financial Position            2

               Consolidated Statements of Income                       3-4

               Consolidated Statements of Stockholders' Equity          5

               Consolidated Statements of Cash Flows                    6

               Selected Notes to Consolidated Financial Statements     7-10

Item 2         Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                11-22

Item 3         Quantitative and Qualitative Disclosures About
                   Market Risk                                          22

Item 4         Controls and Procedures                                  23

PART II        OTHER INFORMATION

Item 1         Legal Proceedings                                        24

Item 1A.       Risk Factors                                             24

Item 2         Unregistered Sales of Equity Securities and Use of
                   Proceeds                                             24

Item 3         Defaults Upon Senior Securities                          24

Item 4         Submission of Matters to a Vote of Security Holders      24

Item 5         Other Information                                        25

Item 6         Exhibits                                                 25

               SIGNATURES                                               26

1

<PAGE>



PART I.   FINANCIAL INFORMATION
Item 1.   Financial Statements (unaudited)

                             HORIZON FINANCIAL CORP.
             Consolidated Statements of Financial Position (unaudited)

                                 ASSETS
                                              September 30,      March 31,
(In thousands, except share data)                 2006             2006
                                              -------------   -------------
Cash and cash equivalents                     $     28,341     $     24,190
Interest-bearing deposits                            3,122            9,439
Investment securities
  Available-for-sale                                56,889           60,137
  Held-to-maturity                                     370              370
Mortgage-backed securities
  Available-for-sale                                27,031           23,351
  Held-to-maturity                                     288              482
Federal Home Loan Bank Stock                         7,247            7,247
Loans receivable, net of allowance of
  loan losses of $15,511 at September
  30 and $14,184 at March 31                     1,036,707          918,510
Loans held for sale, at fair value                   1,806            5,252
Investment in real estate in a joint venture        17,028           16,928
Accrued interest and dividends receivable            6,159            5,185
Bank premises and equipment, net                    27,284           26,317
Deferred income tax receivable                       2,069            2,254
Income tax receivable                                  477              808
Other assets                                        18,380           16,258
                                              ------------     ------------
TOTAL ASSETS                                  $  1,233,198     $  1,116,728
                                              ============     ============

                       LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                      $    921,512     $    834,299
Accounts payable and other liabilities               8,315            6,919
Other borrowed funds                               163,973          141,561
Borrowing related to investment in
 real estate in a joint venture                     19,193           18,276
Advances by borrowers for taxes and insurance          430              467
Deferred compensation                                1,925            1,883
                                              ------------     ------------
     Total liabilities                           1,115,348        1,003,405
                                              ------------     ------------
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; 12,268,054 and 9,898,168
   issued and outstanding, respectively             12,268            9,898
  Additional paid-in capital                        51,318           54,116
  Retained earnings                                 50,557           45,991
  Accumulated other comprehensive income,
   net of tax                                        3,707            3,318
                                              ------------     ------------
     Total stockholders' equity                    117,850          113,323
                                              ------------     ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $  1,233,198     $  1,116,728
                                              ============     ============

                 (See Notes to Consolidated Financial Statements)
2

<PAGE>



                            HORIZON FINANCIAL CORP.
                 Consolidated Statements of Income (unaudited)

                                                        Three months ended
                                                           September 30,
(In thousands, except share data)                         2006         2005
                                                       ----------   ----------
INTEREST INCOME
  Interest on loans                                     $  21,981   $  15,787
  Interest on investments and mortgage-backed
   securities                                               1,012         879
                                                        ---------   ---------
     Total interest income                                 22,993      16,666
                                                        ---------   ---------
INTEREST EXPENSE
  Interest on deposits                                      7,932       4,858
  Interest on other borrowings                              1,928       1,050
                                                        ---------   ---------
     Total interest expense                                 9,860       5,908
                                                        ---------   ---------
     Net interest income                                   13,133      10,758

PROVISION FOR LOAN LOSSES                                     700         750
                                                        ---------   ---------
     Net interest income after provision for loan
      losses                                               12,433      10,008
                                                        ---------   ---------
NONINTEREST INCOME
  Service fees                                                784         727
  Other                                                       429         368
  Net gain on sales of loans - servicing released             206         306
  Net gain on sales of loans - servicing retained               4          38
  Net gain on sale of investment securities                    14           -
                                                        ---------   ---------
     Total noninterest income                               1,437       1,439
                                                        ---------   ---------
NONINTEREST EXPENSE
  Compensation and employee benefits                        4,107       3,625
  Building occupancy                                        1,014         819
  Other expenses                                            1,366       1,142
  Data processing                                             213         218
  Advertising                                                 176         187
                                                        ---------   ---------
     Total noninterest expense                              6,876       5,991
                                                        ---------   ---------

NET INCOME BEFORE PROVISION FOR INCOME TAX                  6,994       5,456

PROVISION FOR INCOME TAX                                    2,344       1,661
                                                        ---------   ---------

NET INCOME                                              $   4,650   $   3,795
                                                        =========   =========

BASIC EARNINGS PER SHARE                                  $ 0.38     $ 0.31*
                                                          ======     ======

DILUTED EARNINGS PER SHARE                                $ 0.37     $ 0.30*
                                                          ======     ======

*restated for the 5 for 4 stock split in the form of a 25% stock dividend
 declared September 26, 2006.

                  (See Notes to Consolidated Financial Statements)
3

<PAGE>



                            HORIZON FINANCIAL CORP.
                  Consolidated Statements of Income (unaudited)

                                                          Six months ended
                                                            September 30,
(In thousands, except share data)                         2006        2005
                                                       ---------    --------
INTEREST INCOME
  Interest on loans                                    $  42,152    $ 30,490
  Investment and mortgage-backed securities                2,024       1,712
                                                       ---------    --------
     Total interest income                                44,176      32,202
                                                       ---------    --------
INTEREST EXPENSE
  Interest on deposits                                    14,524       9,021
  Interest on other borrowings                             3,837       2,149
                                                       ---------    --------
     Total interest expense                               18,361      11,170
                                                       ---------    --------
     Net interest income                                  25,815      21,032

PROVISION FOR LOAN LOSSES                                  1,400       1,475
                                                       ---------    --------
     Net interest income after provision for loan
      losses                                              24,415      19,557
                                                       ---------    --------
NONINTEREST INCOME
  Service fees                                             1,651       1,251
  Other                                                      801       1,035
  Net gain (loss) on sales of loans - servicing released     432         603
  Net gain (loss) on sales of loans - servicing retained       8          52
  Net gain on sale of investment securities                   19          42
                                                       ---------    --------
     Total noninterest income                              2,911       2,983
                                                       ---------    --------
NONINTEREST EXPENSE
  Compensation and employee benefits                       7,974       7,057
  Building occupancy                                       1,968       1,638
  Other expenses                                           2,704       2,368
  Data processing                                            430         435
  Advertising                                                351         357
                                                       ---------    --------
     Total noninterest expense                            13,427      11,855
                                                       ---------    --------

NET INCOME BEFORE PROVISION FOR INCOME TAX                13,899      10,685

PROVISION FOR INCOME TAX                                   4,667       3,177
                                                       ---------    --------

NET INCOME                                             $   9,232    $  7,508
                                                       =========    ========

BASIC EARNINGS PER SHARE                                $  0.75     $  0.60*
                                                        =======     =======

DILUTED EARNINGS PER SHARE                              $  0.74     $  0.60*
                                                        =======     =======

*restated for the 5 for 4 stock split in the form of a 25% stock dividend
 declared September 26, 2006.

                 (See Notes to Consolidated Financial Statements)
4

<PAGE>



<TABLE>

                                      HORIZON FINANCIAL CORP.
                            Consolidated Statements of Stockholders' Equity
                              Six Months Ended September 30, 2006 and 2005
                                              (unaudited)

                                 Common Stock                                                   Accumulated
                             ----------------------    Additional                  Unearned       Other
(In thousands,               Number of                  Paid-In      Retained        ESOP      Comprehensive
except share data)            Shares       At Par       Capital      Earnings       Shares     Income (Loss)
                             ---------  -----------   -----------   -----------    ---------   -------------

                          <c>          <c>          <c>           <c>            <c>           <c>

BALANCE, March 31, 2005       10,038       $10,038      $54,737       $38,939         $(72)       $3,382
Comprehensive income
 Net income                        -             -            -         7,508            -             -
 Other comprehensive income
  Change in unrealized
   losses on available-for-
   sale securities, net
   taxes (benefit) of $(148)       -             -            -             -            -          (287)
  Total other comprehensive
   income                          -             -            -             -            -             -
Comprehensive income               -             -            -             -            -             -
Cash dividends on common
 stock at $.28/sh                  -             -            -        (2,782)           -             -
Stock options exercised           54            54          258             -            -             -
Tax benefit associated with
 stock options                     -             -           97             -            -             -
Treasury stock purchased           -             -            -             -            -             -
Retirement of treasury
 stock                          (173)         (173)        (987)       (2,318)           -             -
                              ------       -------      -------       -------         ----        ------
BALANCE, September 30,
 2005                          9,919       $ 9,919      $54,105       $41,347         $(72)       $3,095
                              ======       =======      =======       =======         ====        ======

BALANCE, March 31, 2006        9,898       $ 9,898      $54,116       $45,991         $  -        $3,318
Comprehensive income
 Net income                        -             -            -         9,232            -             -
 Other comprehensive income
  Change in unrealized
   gains on available-for-
   sale securities, net
   taxes of $209                   -             -            -             -            -           389
  Total other comprehensive
   income                          -             -            -             -            -             -
Comprehensive income               -             -            -             -            -             -
Cash dividends on common
 stock at $.275/sh                 -             -            -        (3,008)           -             -
5 for 4 stock split in
 the form of a 25%
 stock dividend                2,454         2,454       (2,454)            -            -             -
Stock options exercised            9             9           62             -            -             -
Stock award plan                   -             -          111             -            -             -
Tax benefit associated
 with stock options                -             -           12             -            -             -
Treasury stock purchased           -             -            -             -            -             -
Retirement of treasury
 stock                           (93)          (93)        (529)       (1,658)           -             -
                              ------       -------      -------       -------         ----        ------
BALANCE, September 30,
 2006                         12,268       $12,268      $51,318       $50,557         $  -        $3,707
                              ======       =======      =======       =======         ====        ======

</TABLE>

<TABLE>
                                  Treasury                             Total
                                   Stock         Stockholders'      Comprehensive
                                  at Cost           Equity             Income
                               -------------     ------------       --------------

                            <c>               <c>                <c>

BALANCE, March 31, 2005         $     -           $107,024
Comprehensive income
 Net income                           -              7,508           $ 7,508
 Other comprehensive income
  Change in unrealized
   losses on available-for-
   sale securities, net
   taxes (benefit) of $(148)          -               (287)             (287)
                                                                     -------
  Total other comprehensive
   income                                                -              (287)
                                                                     -------
Comprehensive income                  -                  -           $ 7,221
                                                                     =======
Cash dividends on common
 stock at $.28/sh                     -             (2,782)
Stock options exercised               -                312
Tax benefit associated with
 stock options                        -                 97
Treasury stock purchased         (3,478)            (3,478)
Retirement of treasury
 stock                            3,478                  -
                                -------           --------
BALANCE, September 30,
 2005                           $     -           $108,394
                                =======           ========

BALANCE, March 31, 2006         $     -           $113,323
Comprehensive income
 Net income                           -              9,232           $ 9,232
 Other comprehensive income
  Change in unrealized
   gains on available-for-
   sale securities, net
   taxes of $209                      -                389               389
                                                                     -------
  Total other comprehensive
   income                                                -               389
                                                                     -------
Comprehensive income                  -                  -           $ 9,621
                                                                     =======
Cash dividends on common
 stock at $.275/sh                    -             (3,008)
5 for 4 stock split in
 the form of a 25%
 stock dividend                       -                  -
Stock options exercised               -                 71
Stock award plan                      -                111
Tax benefit associated
 with stock options                   -                 12
Treasury stock purchased         (2,280)            (2,280)
Retirement of treasury
 stock                            2,280                  -
                                -------           --------
BALANCE, September 30,
 2006                           $     -           $117,850
                                =======           ========
</TABLE>

          (See Notes to Consolidated Financial Statements)

5

<PAGE>



                            HORIZON FINANCIAL CORP.
               Consolidated Statements of Cash Flows (unaudited)

                                                           Six Months Ended
(In thousands, except share data)                            September 30,
                                                           2006       2005
                                                        ---------   --------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                            $   9,232   $  7,508
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                               489        355
  Stock dividends - Federal Home Loan Bank stock                -        (29)
  Stock award plan compensation                               111          -
  Provision for deferred income tax                           (24)         -
  Provision for loan losses                                 1,400      1,475
  Excess tax benefits from the exercise of stock options      (12)       (97)
Changes in assets and liabilities
  Accrued interest and dividends receivable                  (973)      (279)
  Interest payable                                          1,530        985
  Net change in loans held for sale                         3,446      1,709
  Federal income tax (receivable) payable                     331       (613)
  Other assets                                             (2,110)       (90)
  Other liabilities                                          (227)    (2,059)
                                                        ---------   --------
     Net cash flows from operating activities              13,193      8,865
                                                        ---------   --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing deposits, net              6,317     (2,812)
  Purchases of investment securities - available-
   for-sale                                                (1,500)    (5,815)
  Proceeds from sales and maturities of
   investment securities - available-for-sale               5,149     16,080
  Purchases of mortgage-backed securities -
   available-for-sale                                      (9,384)    (6,197)
  Proceeds from maturities of mortgage-backed
   securities - available-for-sale                          5,900      3,930
  Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                              194        263
  Net change in loans                                    (119,160)   (63,780)
  Purchases of bank premises and equipment                 (1,894)    (1,466)
  Net change in investment in joint venture                  (100)       393
                                                        ---------   --------
     Net cash flows from investing activities            (114,478)   (59,404)
                                                        ---------   --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                                   87,213     54,089
  Advances from other borrowed funds                      124,412     75,727
  Repayments of other borrowed funds                     (102,000)   (72,500)
  Advances on borrowing related to investment in
   real estate in a joint venture                             917        736
  Common stock issued, net                                     71        311
  Tax benefit associated with stock options                    12         97
  Cash dividends paid                                      (2,909)    (2,749)
  Treasury stock purchased                                 (2,280)    (3,478)
                                                        ---------   --------
     Net cash flows from financing activities             105,436     52,233
                                                        ---------   --------
NET CHANGE IN CASH AND CASH EQUIVALENTS                     4,151      1,694
CASH AND CASH EQUIVALENTS, beginning of period             24,190     23,250
                                                        ---------   --------
CASH AND CASH EQUIVALENTS, end of period                $  28,341   $ 24,944
                                                        =========   ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest              $  16,831   $ 10,185
                                                        =========   ========
  Cash paid during the period for income tax            $   4,349   $  3,790
                                                        =========   ========

                (See Notes to Consolidated Financial Statements)

6

<PAGE>



                           HORIZON FINANCIAL CORP.
             SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006
                                (unaudited)

NOTE 1 - Basis of Presentation and Significant Accounting Policies

Basis of Presentation
---------------------

     The consolidated financial statements as of and for the three and six
months ended September 30, 2006, include the accounts of Horizon Financial
Corp. (Horizon Financial or the Corporation), and its wholly-owned subsidiary
Horizon Bank (Horizon Bank or 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 of America 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 accounting principles generally accepted in the United States
of America 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 three and
six month periods ended September 30, 2006 and 2005 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 on Form 10-K for the year
ended March 31, 2006.

Stock Dividend Declared
-----------------------

     On September 26, 2006, the Corporation announced a 5-for-4 stock split to
be paid in the form of a 25% stock dividend paid on October 23, 2006 to
stockholders of record on October 6, 2006.  Accordingly, all share and per
share amounts have been adjusted to reflect the split.

Reclassification
----------------

     Certain reclassifications have been made to prior financial statements to
conform with current presentation.  Such reclassifications have no effect on
net income, equity, or earnings per share.

Significant Accounting Policies
-------------------------------

     In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities.
FIN 46 explains the concept of a variable interest entity and requires
consolidation by the primary beneficiary where the variable interest entity
does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parties.  This
interpretation applies immediately to variable interest entities in which an
enterprise holds a variable interest.  In October 2004, the Bank's wholly
owned subsidiary, Westward Financial Services, Inc (Westward Financial),
entered into a real estate development joint venture with Greenbriar Northwest
LLC (GBNW), an established residential land development company headquartered
in Bellingham, Washington.  The Corporation believes that GBNW is a variable
interest entity.  Under FIN 46 GBNW is consolidated in the Corporation's
consolidated balance sheet.  The Corporation also accounts for the portion not
owned by Westward Financial, as a minority interest.  The investment in real
estate is recorded as an asset and the related debt is recorded as the
Corporation's liability.  The real estate joint venture has a carrying amount
of approximately $17.0 million, with a related borrowing of approximately
$19.2 million.  No income is currently being recognized in the Corporation's
financial statements; however, in accordance with FIN 46, one half of the
related funding expense is included in the Corporation's interest on other
borrowings expense which amounts to approximately $133,000 and $81,000 for the
three months ended September 30, 2006 and 2005, respectively and approximately
$254,000 and $148,000 for the six months ended September 30, 2006 and 2005,
respectively.

7

<PAGE>



NOTE 2 - Stockholders' Equity

Net Income Per Share
--------------------

     The following table illustrates the reconciliation of weighted average
shares, as adjusted, used for earnings per share for the noted periods:

                                 Three months ended       Six months ended
                                    September 30,           September 30,
                               ----------------------  -----------------------
                                  2006        2005       2006         2005
                               ----------  ----------  ----------   ----------

Basic weighted average shares
 outstanding                   12,285,606  12,430,021  12,312,727   12,463,413
Incremental shares from
 unexercised stock options
 and unvested restricted stock
 awards                           125,965     116,840     116,590      129,280
                               ----------  ----------  ----------   ----------
Diluted weighted average
 shares outstanding            12,411,571  12,546,861  12,429,317   12,592,693
                               ==========  ==========  ==========   ==========

As of September 30, 2006 and 2005, there were no anti-dilutive shares
outstanding related to options to acquire the Corporation's common stock.

Cash Dividend Declared
----------------------

     On September 26, 2006, the Corporation announced a quarterly cash
dividend of 12.5 cents per share payable on November 13, 2006 to stockholders
of record on October 27, 2006.

NOTE 3 - Share Based Payment and Stock Option and Award Plans

Share Based Payment
-------------------

     The Corporation adopted Statement of Financial Accounting Standard (SFAS
or Statement) No. 123R, Share-Based Payment, (SFAS 123R) on April 1, 2006
using the "modified prospective" method.  Under this method, awards that are
granted, modified, or settled after March 31, 2006 are measured and accounted
for in accordance with Statement 123R.  Also under this method, expense is
recognized for unvested awards that were granted prior to April 1, 2006 based
upon the fair value determined at the grant date under Statement 123,
Accounting for Stock-based Compensation (Statement 123).  For the three and
six months ended September 30, 2006, the Corporation recognized $92,000 and
$111,000, respectively, in stock option and restricted stock award
compensation expense as a component of salaries and benefits.  As of September
30, 2006, there was approximately $631,000 of total unrecognized compensation
cost related to nonvested options and restriced stock awards which is
scheduled to amortize over the next four years.

     The Corporation measures the fair value of each stock option grant at the
date of grant, using the Black Scholes option pricing model.  The weighted
average fair value of options granted during the six months ended September
30, 2006, was $4.18 per share, as adjusted.  There were no options or awards
granted during the three months ended September 30, 2006.  The following
assumptions were used in arriving at the fair value of options granted during
the six months ended September 30:

                                                        2006
                                                       ------
       Risk-free interest rate                         5.270%
       Dividend yield rate                             2.417%
       Price volatility                               24.770%
       Expected life of options                      3.78 years

     Prior to the adoption of Statement 123R, the Corporation recognized the
financial effects of stock options under the intrinsic value method as
permitted by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and as such, previously recognized no compensation cost
for employee stock options.

8

<PAGE>



NOTE 3 - Share Based Payment and Stock Option and Award Plans (continued)

     The following table illustrates the effect on net income and earnings per
share, as adjusted, had the Corporation applied the fair value recognition
provisions of Statement 123 in fiscal 2006.

Pro forma disclosures:                            Three Months   Six Months
---------------------                                ended         ended
                                                 Sept 30, 2005  Sept 30, 2005
(In thousands, except per share data)            -------------  -------------

Net income as reported                               $3,795        $7,508
Additional compensation for fair value of
 stock options                                           (2)          (12)
                                                     ------        ------
Pro forma net income                                 $3,793        $7,496
                                                     ======        ======
Earnings per share
------------------

Basic

  As reported                                        $ 0.31        $ 0.60
                                                     ======        ======
  Pro forma                                          $ 0.31        $ 0.60
                                                     ======        ======

Diluted

  As reported                                        $ 0.30        $ 0.60
                                                     ======        ======
  Pro forma                                          $ 0.30        $ 0.60
                                                     ======        ======

Stock Option and Award Plans
----------------------------

     The Corporation may grant options and/or awards for a maximum of 937,500
shares, as adjusted, of authorized common stock to certain officers and key
employees under the 2005 Incentive Stock Plan.  Options and awards 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
and awards are generally exercisable within one to five years from date of
grant and expire after ten years.

     The following table summarized stock option and award activity for the
six months ended September 30, 2006:

                                  Shares of Common Stock
                                --------------------------   Weighted Average
                                Available For  Outstanding       Price of
                                Option/Award    Under Plan   Shares Under Plan
                                -------------  -----------   -----------------

     Balance, March 31, 2006       906,235        188,980
       Restricted stock awards     (24,045)                       $19.86
       Granted                     (24,045)        24,045         $19.86
       Exercised                         -        (11,324)        $ 6.26
       Lapsed                        1,851         (1,851)        $16.74
       Expired                        (631)             -
                                   -------        -------
     Balance, September 30, 2006   859,365        199,850
                                   =======        =======

9

<PAGE>

NOTE 3 -  Share Based Payment and Stock Option and Award Plans (continued)

Financial data pertaining to outstanding stock options and exercisable stock
options at September 30, 2006 is as follows:

                           Options Outstanding            Options Exercisable
                  -------------------------------------  ---------------------
                                 Weighted
                                 Average      Weighted
 Range of                        Remaining    Average                 Average
 Exercise            Number     Contractual   Exercise     Number     Exercise
 Prices           Outstanding      Life        Price     Exercisable    Price
----------        -----------   -----------   ---------  -----------  --------

$5.00 to $9.99      138,360     3.77 years     $ 6.66      138,047     $ 6.66
$10.00 to $14.99     10,000     6.65 years     $12.00        7,185     $11.90
$15.00 to $20.00     51,490     9.22 years     $17.96        6,251     $16.02

     At September 30, 2006, the aggregate intrinsic value of stock options
outstanding and stock options exercisable was $2.9 million and $2.6 million,
respectively.

NOTE 4 -  New Accounting Pronouncements

     In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in
Income Taxes   an interpretation of FASB Statement No. 109 Accounting for
Income Taxes.  This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements.  This
interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return.  FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition.  This interpretation is effective
for fiscal years beginning after December 15, 2006.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157).  SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements.  This Statement applies to
other accounting pronouncements that require or permit fair value
measurements.  Accordingly, this Statement does not require any new fair value
measurements.  This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years.

10

<PAGE>



Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


     The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and its
subsidiaries. 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 of Financial Condition and Results
of Operations and this Form 10-Q contain certain forward-looking statements
which are based on assumptions and describe future plans, strategies and
expectations of the Corporation.  Management desires to take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and is including this statement for the express purpose of availing the
Corporation of the protections of the safe harbor with respect to all
forward-looking statements in this Form 10-Q.  These forward-looking
statements are generally identified by use of the word "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar words.  The
Corporation's ability to predict results of the actual effect of future plans
or strategies is uncertain.  Factors which could have a material adverse
effect on the Corporation's operations include, but are not limited to,
changes in interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Corporation's
market areas and accounting principles and guidelines.  These risks and
uncertainties should be considered in evaluating forward-looking statements
and you should not rely too much on these statements.

General
-------

     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 name, "Horizon Bank".  Effective August 1, 2005, the
Bank converted from a state chartered savings bank to a state chartered
commercial bank.

     The Bank's operations are conducted through 18 full-service office
facilities, four commercial loan centers, and four real estate loan centers,
located in Whatcom, Skagit, Snohomish, and Pierce counties in Northwest
Washington.  In fiscal 2002, the Bank acquired a bank site in Lynnwood, which
was remodeled and opened for business in March 2003.  The Bank opened
commercial banking/loan centers in Bellingham and Everett, Washington, and
expanded its operations in Burlington, Washington during the first quarter of
fiscal 2004.  In November 2004, the Bank opened a full service office in
Marysville, Washington.  In April 2005, the Bank opened a full service office
in Lakewood, Washington, located in Pierce County, just south of Tacoma.  The
Bank opened a full service regional facility in June 2006, which replaced the
Bank's existing office and commercial banking center in south Everett.

     The Corporation's results of operations depend primarily on revenue
generated as a result of its net interest income and noninterest income.  Net
interest income is the difference between the interest income the Corporation
earns on its interest-earning assets (consisting primarily of loans and
investment and mortgage-backed securities) and the interest the Corporation
pays on its interest-bearing liabilities (consisting primarily of customer
savings and money market accounts, time deposits and borrowings).  Noninterest
income consists primarily of service charges on deposit and loan accounts,
gains on the sale of loans and investments, and loan servicing fees. The
Corporation's results of operations are also affected by its provisions for
loan losses and other expenses.  Other expenses consist primarily of
noninterest expense, including compensation and benefits, occupancy,
equipment, data processing, marketing, automated teller machine costs and,
when applicable, deposit insurance premiums.  The Corporation's results of
operations may also be affected significantly by general and local economic
and competitive conditions, changes in market interest rates, governmental
policies and actions of regulatory authorities, as well as other factors
identified under the caption "Forward Looking Statements" above.

Business Strategy
-----------------

     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

11

<PAGE>



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 many of its 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.

Operating Strategy
------------------

     The Corporation serves as a holding company for the Bank and other
subsidiaries whereby it provides strategic oversight, management, access to
capital and other resources and activities typically performed by bank holding
companies.  The operating strategy of the Corporation has been to expand and
diversify its consolidated operations across a variety of companies and/or
operating units that are engaged in complementary, but different, businesses
and/or operating strategies.  This diversification strategy is expected to
continue as opportunities arise, although there are no specific acquisitions
or new business formations planned at this time.  The Bank currently has only
one office in Pierce County (south of King County), with the remaining offices
all located north of King County.  Management hopes to expand it's presence in
pierce county to provide additional support to its Lakewood office in the near
future.  Management has further indicated that the market areas just outside
King County (including, but not necessarily limited to Snohomish, Pierce,
Kitsap and Thurston counties) are logical areas for potential future
expansion, as these markets have characteristics most similar to those in
which the Bank has experienced previous success.

     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 commercial,
consumer, and real estate loans in its primary market area.  In addition, and
to a lesser extent, the Bank invests in a variety of investment grade
securities including, but not necessarily limited to U.S. Government and
federal agency obligations, mortgage-backed securities, corporate debt, equity
securities, and municipal securities.  The Bank intends to continue to fund
its assets primarily with retail and commercial deposits, although, FHLB
advances, brokered deposits, and other wholesale borrowings, will also likely
be used as a supplemental source of funds.

     The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings. The Bank reviewed its opportunities
with respect to both assets and liabilities.  In the past two fiscal years,
for example, the Bank chose to concentrate its commercial lending efforts on
growing its Prime based loan portfolio, at a time when many lenders were
offering fixed rate real estate loans at sub-Prime rates.  In this regard, the
Bank's loan portfolio growth was heavily concentrated in the active real
estate development markets in the Puget Sound region.  Through its excellent
relationships with established real estate developers, the Bank's experienced
loan officers were successful at growing this portion of the Bank's portfolio,
which is primarily Prime based business.  This has been beneficial in the past
year, with the Federal Reserve's Open Market Committee's (FOMC) efforts to
increase short terms interest rates, which have in turn increased the Prime
lending rate on a regular basis.  The results of this strategy are discussed
in more detail in the section entitled "Comparison of Operating Results for
the Three and Six Months Ended September 30, 2006 and September 30, 2005".  On
the liability side of the balance sheet, the impact of these increasing rates
has also impacted the Bank's earnings, however at a more moderate level to
date.  Management acknowledges that there is a lag effect in this regard, as
the rates on the Bank's certificate of deposit liabilities do not adjust
instantly, rather the impact occurs more gradually as the certificates of
deposit mature and reprice in this higher rate environment.  These increases
in liability expenses will continue even after the FOMC stops its tightening
cycle, as long as the rates being offered for new certificates of deposit are
higher than those maturing (as is the case currently).

     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
Corporation's profitability is also affected by the level of the Bank's other
income and expenses.  Other noninterest income includes income associated with
the origination and sale of mortgage loans, loan servicing fees, deposit
account related fees, and net gains and losses on sales of interest-earning
assets.  This portion of the Bank's income is heavily dependent on the Bank's
success at originating and selling one-to-four family mortgage loans into the
secondary market.  In addition, the Bank's ability to generate fee income on
its deposit accounts impacts this portion of the Bank's income stream.  In
fiscal 2006, the Bank introduced an Overdraft Protection service, which
enhanced the deposit related fee income and is discussed in more detail in the
section entitled "Comparison of Operating Results for the Three and Six Months
Ended September 30, 2006 and September 30, 2005."

     Other noninterest expenses include compensation and benefits, occupancy
and equipment expenses, deposit insurance premiums, data servicing expenses
and other operating costs.  In fiscal 2006, the Bank began a Bank-wide
efficiency initiative, soliciting input from all employees and implementing
many of the suggestions made during the project.  This is an ongoing process,
as management continues to look for ways to improve efficiency. To encourage
employees to participate in this initiative, the Bank has added a
profitability component to the incentive portion of the employee's pay, and

12

<PAGE>



efficiency accounts for one-third of this profitability component.  Also
during fiscal 2006, the Bank formed a Core Data Processor task team, to
analyze ways to best utilize its new data processing system.  At the time of
conversion in November 2004, the focus was appropriately on getting the data
converted from the previous system.  Subsequently, the focus shifted to
ensuring that the Bank was taking advantage of the benefits offered by the new
system, and this is a process that will continue in future years.

     Finally, the Corporation's results of operations are also significantly
affected by general economic and competitive conditions, particularly changes
in market interest rates, government legislation, regulation, and monetary and
fiscal policies.

Financial Condition
-------------------

     Total consolidated assets for the Corporation at September 30, 2006, were
$1.2 billion, a 10.4% increase from $1.1 billion at March 31, 2006.  This
increase in assets was primarily a result of the growth in loans receivable,
which increased 12.9% to $1.0 billion at September 30, 2006 from $918.5
million at March 31, 2006.  The growth in loans receivable was primarily
attributable to a $31.0 million, or 25.1%, increase in commercial loans and a
$81.8 million, or 31.2%, increase in construction and land development loans
since March 31, 2006.  The Bank continued its focus on expanding its
relationships with established residential real estate developers and
one-to-four family residential builders, which resulted in the continued
growth in this component of loans receivable during the period.  One-to-four
family mortgage loans increased slightly during the period, as the Bank
continued its practice of selling most of its single-family fixed rate loan
production into the secondary market.  The Bank sold $40.6 million of real
estate loans during the six months ended September 30, 2006, compared to $60.3
million during the six months ended September 30, 2005.

The following is an analysis of the loan portfolio by major type of loans:
                                           September 30,        March 31,
(In thousands)                                 2006                2006
                                           -------------      -------------
 1-4 mortgage loans
   1-4 family                                $   151,720       $   148,515
   1-4 family construction                        24,268            20,971
   Less participations sold                      (53,186)          (56,546)
                                             -----------       -----------
     Net 1-4 family mortgage loans               122,802           112,940
 Construction and land development               344,193           262,358
 Multi family residential                         68,093            70,080
 Commercial real estate                          309,675           314,299
 Commercial loans                                154,490           123,445
 Home equity secured                              46,900            44,001
 Other consumer loans                              6,065             5,571
                                             -----------       -----------
     Subtotal                                    929,416           819,754
                                             -----------       -----------
 Total loans receivable                        1,052,218           932,694
                                             -----------       -----------
 Less:
   Allowance for loan losses                     (15,511)          (14,184)
                                             -----------       -----------
   Net loans receivable                      $ 1,036,707       $   918,510
                                             ===========       ===========

 Net residential loans                       $   121,785   12% $   111,967 12%
 Net commercial loans                            151,689   14%     121,117 13%
 Net commercial real estate loans (1)            711,095   69%     636,657 70%
 Net consumer loans (2)                           52,138    5%      48,769  5%
                                             ----------- ----  ---------- ----
                                             $ 1,036,707 100%  $  918,510 100%
                                             =========== ====  ========== ====

(1) Includes construction and development, multi-family and commercial real
    estate loans.
(2) Includes home equity and other consumer loans.

     As reflected in the table above, approximately 69% of our net loan
portfolio consists of commercial real estate and construction and development
loans.  These types of lending afford the Bank an opportunity to receive
interest at rates higher than those generally available from one-to-four
family residential lending.  These loans, however, also typically are greater
in amount, more difficult to evaluate and monitor and, therefore, involve a
greater degree of risk than one-to-four family residential mortgage loans.
Because payments on loans secured by commercial real estate often depend upon
the successful operation and management of the properties, repayment of such
loans may be affected by adverse conditions in the real estate market or the
economy.  The Bank seeks to minimize these risks by limiting the maximum
loan-to-value ratio to 80% and

13

<PAGE>



carefully reviewing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan.

     Construction and land development lending generally involves a higher
degree of risk than permanent financing for a finished residence or commercial
building, because of the inherent difficulty in estimating both the estimated
cost of the project and the property's value at completion.  If the estimated
cost of construction proves to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to complete the project.
To address this risk, and because of the level of construction loans in the
Bank's portfolio, the Bank has personnel dedicated specifically to monitoring
the progress of its construction projects, and making on-site inspections of
the property.  In addition, in an effort to monitor the available inventory in
its markets, the Bank also regularly reviews the overall building and
development activity in its markets.  Also, to mitigate the risks related to
construction lending, the Bank primarily deals with experienced builders, with
acceptable credit histories, sound financial statements, and a proven track
record in the industry.  In addition, the Bank utilizes the services of
experienced inspectors to monitor the progress and draw process in the more
complex construction projects.  The Bank also has an experienced appraisal
staff, and members of senior management with related appraisal education and
experience, who review each appraisal utilized by the Bank in analyzing
prospective construction projects.  Finally, members of the Bank's senior
management and loan committees also have a significant amount of experience in
the areas of construction lending, appraisals, and loan underwriting, further
mitigating the Bank's risk in this area.

     The Bank actively originates construction loans through both its Mortgage
Loan Division and its Commercial Loan Division.  The Bank's Mortgage Loan
Division generally oversees the single family custom construction loans, and
to a lesser extent, speculative construction loans (i.e., loans for homes that
do not have a contract with a buyer for the purchase of the home upon
completion of the construction) to smaller contractors building a limited
number of speculative homes per year.  These construction loans are further
broken down in the first two lines of the table below (speculative
construction one-to-four family and custom construction one-to-four family).
The Bank's Commercial Lending Division is responsible for the speculative
construction projects for the Bank's larger builders (including large
one-to-four family developments), in addition to the Bank's multi-family
construction loans, non-residential commercial construction loans, and the
Bank's land development loans.

     The following table is provided to show additional details on the
Corporation's construction and land development loan portfolio:

                                     September 30, 2006       March 31, 2006
                                     ------------------     -----------------
(In thousands)                       Amount     Percent     Amount    Percent
                                     ------     -------     ------    -------
Speculative construction 1-4
 family                             $ 12,868      3.5%     $  8,675      3.1%
Custom construction 1-4 family        11,400      3.1        12,296      4.3
                                    --------     -----     --------   ------
 Total 1-4 family construction        24,268      6.6        20,971      7.4

Commercial speculative
 construction 1-4 family             131,891     35.8        95,534     33.7
Commercial construction multi
 family                                8,199      2.2         6,927      2.4
 Commercial construction              70,507      19.1       56,328     19.9
Commercial residential land
 development                         133,596      36.3      103,569     36.6
                                    --------     -----     --------   ------
  Total construction and land
   development                       344,193      93.4      262,358     92.6
                                    --------     -----     --------   ------
  Total construction loans          $368,461     100.0%    $283,329    100.0%
                                    ========     ======    ========   ======
14

<PAGE>




     The tables below display the characteristics of the available for sale
(AFS) and held-to-maturity (HTM) portfolios as of September 30, 2006:

                                                         Net        Estimated
                                           Amortized   Unrealized      Fair
                                              Cost     Gain/(Loss)     Value
                                          ----------  -----------   ----------
(In thousands)
AFS Securities
 State and political subdivisions
   and U.S. government agency
   securities                             $   44,784   $     (407)  $   44,377
 Marketable equity securities                    323        6,305        6,628
 Mutual funds                                  5,000         (121)       4,879
 Corporate debt securities                     1,005            -        1,005
 Mortage-backed securities and
   Collateralized mortgage obligations
   (CMOs)                                     27,043          (12)      27,031
                                          ----------   ----------    ---------
   Total available-for-sale securities        78,155        5,765       83,920
                                          ----------   ----------    ---------
HTM Securities
 State and political subdivisions and U.S.
   government agency securities                  370            3          373
 Mortgage-backed securities and CMOs             288           10          298
                                          ----------   ----------    ---------
   Total held-to-maturity securities             658           13          671
                                          ----------   ----------    ---------
   Total securities                       $   78,813   $    5,778    $  84,591
                                          ==========   ==========    =========


                        Maturity Schedule of Securities at September 30, 2006
                        -----------------------------------------------------
                           Available-For-Sale            Held-To-Maturity
                        -------------------------     -----------------------
                         Amortized     Estimated      Amortized    Estimated
(In thousands)              Cost       Fair Value        Cost      Fair Value
                        ----------    -----------     ----------   ----------
Maturities:
   Less than one year    $  15,202    $    15,179     $        -   $        -
   One to five years        25,376         24,974            625          629
   Over five to ten
    years                   11,947         11,941              2            8
   Over ten years           20,307         20,319             31           34
                         ---------    -----------     ----------   ----------
                            72,832         72,413            658          671
                         ---------    -----------     ----------   ----------
Mutual funds and marketable
   equity securities
  (liquid)                   5,323         11,507              -            -
                         ---------    -----------     ----------   ----------
Total investment
   securities            $  78,155    $    83,920     $      658   $      671
                         =========    ===========     ==========   ==========

     Total liabilities increased 11.1% to $1.1 billion at September 30, 2006,
from $1.0 billion at March 31, 2006.  This increase in liabilities was
primarily the result of growth in deposits, which increased 10.4% to $921.5
million at September 30, 2006 from $834.3 million at March 31, 2006.  The
following is an analysis of the deposit portfolio by major type of deposit at
September 30, 2006 and March 31, 2006:

(In thousands)                                 Sept 30, 2006    March 31, 2006
                                               -------------    --------------
 Demand deposits
 Savings                                         $    24,066     $      30,808
 Checking                                             76,850            79,774
 Checking (noninterest-bearing)                       94,028            80,778
 Money Market                                        176,384           156,867
                                                 -----------     -------------
                                                     371,328           348,227
                                                 -----------     -------------
Time certificates of deposit
 Less than $100,000                                  262,714           246,136
 Greater than or equal to $100,000                   287,470           239,936
                                                 -----------     -------------
                                                     550,184           486,072
                                                 -----------     -------------
Total deposits                                   $   921,512     $     834,299
                                                 ===========     =============

15

<PAGE>



     Also contributing to the growth in liabilities during the current quarter
was an increase of 15.8% in other borrowed funds to $164.0 million at
September 30, 2006 from $141.6 million at March 31, 2006.  During the quarter
the Bank borrowed additional funds from the FHLB to help manage interest rate
risk and support asset growth.

     Also included in the September 30, 2006 balance sheet is an investment in
real estate for a joint venture and the corresponding borrowing.  During the
year ended March 31, 2005, Westward Financial as a 50% partner in the GBNW
(Greenbriar Northwest LLC), purchased an 85 acre parcel of land in Bellingham
for future development.  GBNW intends to develop the property in future years,
into a neighborhood community to be known as Fairhaven Highlands.   The $17.0
million reflected on the Corporation's Consolidated Statements of Financial
Position as an asset at September 30, 2006 represents the current level of the
investment in real estate joint ventures, including the Fairhaven Highlands
joint venture.   This amount also includes the remaining net investment in a
residential development joint venture that has since been completed and
closed. The $19.2 million shown in the liability section of the Consolidated
Statements of Financial Position represents the corresponding wholesale
borrowing used to fund the investment in the Fairhaven Highlands joint
venture.  At this time, the partnership is in the process of meeting with the
appropriate public and private entities, in its preliminary planning efforts
relating to the future development of the property.

     Stockholders' equity at September 30, 2006 increased 4.0% to $117.9
million from $113.3 million at March 31, 2006.  This increase was primarily
attributable to the increase in net income to $9.2 million for the six months
ended September 30, 2006 from $7.5 million for the six months ended September
30, 2005.  This change also included the effects from the Corporation's share
repurchase program.  Repurchases totaled $2.3 million for the six months ended
September 30, 2006 compared to $3.5 million for the six months ended September
30, 2005.  The Corporation remains strong in terms of its capital position,
with a stockholder equity-to-assets ratio of 9.6% at September 30, 2006,
compared to 10.2% at March 31, 2006.

Comparison of Operating Results for the Three Months Ended September 30, 2006
and September 30, 2005
-----------------------------------------------------------------------------

     General.  Net income increased 22.5% to $4.7 million for the three months
ended September 30, 2006 from $3.8 million for the three months ended
September 30, 2005.  Diluted earnings per share for the three months ended
September 30, 2006 was $0.37 on weighted average shares outstanding of
12,411,571, compared to diluted earnings per share of $0.30 on weighted
average shares of 12,546,861 for the three months ended September 30, 2005.

     Net Interest Income.  Net interest income before provision for loan
losses for the three months ended September 30, 2006 increased 22.1% to $13.1
million from $10.8 million for the comparable period in 2005.  Interest on
loans for the quarter ended September 30, 2006 increased 39.2% to $22.0
million, from $15.8 million for the comparable quarter a year ago.  This
increase was a result of a combination of factors, including: 1) the growth in
loans receivable, as the Bank experienced significant loan growth during the
quarter, increasing the loan portfolio to $1.0 billion at September 30, 2006
compared to $867.7 million at September 30, 2005; and 2) a higher Prime
lending rate.  Interest and dividends on investments and mortgage-backed
securities for the three months ended September 30, 2006 increased 15.1% to
$1.0 million, from $879,000 for the comparable quarter a year ago.  This
increase was a result of a higher level of investments and mortgage-backed
securities outstanding during the respective periods, as average total
investments increased slightly to $93.1 million at September 30, 2006 as
compared to $92.1 million at September 30, 2005. Also contributing to the
increase was the restructuring of approximately $13.0 million of the
investment securities portfolio during the quarter ended March 31, 2006. The
proceeds from those lower-yielding securities have been reinvested in highly
rated, higher-yielding investments.  Total interest income increased 38.0% to
$23.0 million at September 30, 2006 from $16.7 million in the comparable
period one year ago.

     Total interest paid on deposits increased 63.3% to $7.9 million for the
quarter ended September 30, 2006 from $4.9 million for the quarter ended
September 30, 2005, as a result of significant growth in average deposits
outstanding to $906.2 million at September 30, 2006 compared to $784.4 million
at September 30, 2005.  Also contributing to the increase was the increasing
level of interest rates during the year which resulted in an increase in
interest expense, including interest paid on the Bank's deposits.  Interest on
borrowings increased 83.7% to $1.9 million during the quarter ended September
30, 2006, compared to $1.0 million for the comparable period one year ago.
The increased expense in the current year was a result of a higher level of
average borrowings outstanding during the quarter ended September 30, 2006 of
$161.5 million compared to $118.0 million during the quarter ended September
30, 2005, along with the increasing rate environment.  The Bank continues to
carry wholesale borrowings in order to further leverage its balance sheet and
better manage its interest rate risk profile.

16

<PAGE>




     The following tables are presented to further illustrate the changes in
the primary factors impacting the Bank's net interest income:

                                            For the quarter ended Sept 30,
Average balances:                              2006               2005
                                            -----------        -----------
 (In thousands)

  Loans                                     $ 1,008,100        $   844,446
  Investments                                    93,101             92,083
                                            -----------        -----------
  Total interest-earning assets               1,101,201            936,529

  Deposits                                  $   906,228        $   784,384
  Borrowings                                    161,466            118,048
                                            -----------        -----------
  Total interest-bearing liabilities          1,067,694            902,432

  Average assets                              1,211,989          1,041,954
  Average stockholders' equity                  116,125            107,859

                                            For the quarter ended Sept 30,
Weighted average interest rates:               2006               2005
                                            -----------        -----------
  Yield on loans                                8.72%              7.48%
  Yield on investments                          4.35%              3.82%
                                            -----------        -----------
  Yield on interest-earning assets              8.35%              7.12%

  Cost of deposits                              3.50%              2.48%
  Cost of borrowings                            4.78%              3.56%
                                            -----------        -----------
  Cost of interest-bearing liabilities          3.69%              2.62%

  Net interest spread                           4.66%              4.50%
  Net interest margin                           4.77%              4.59%

     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.

                                            For the quarter ended Sept 30,
                                            ------------------------------
     Allowance for Loan Losses                 2006               2005
                                            -----------        -----------
     (In thousands)

     Allowance at beginning of period         $  14,854        $    12,448
     Provision for loan losses                      700                750
     Charge offs (net of recoveries)                (43)               (37)
                                            -----------        -----------
     Allowance at end of period               $  15,511        $    13,161
     Allowance for loan losses as a
      percentage of net loans receivable
      at the end of the period                     1.50%              1.52%

     Net charge-offs as a percentage of average
      loans outstanding during the period         0.004%             0.004%

     The provision for loan losses was $700,000 for the quarter ended
September 30, 2006 compared to $750,000 for the quarter ended September 30,
2005.  These provisions reflect management's ongoing analysis of changes in
loan portfolio composition by collateral categories, overall credit quality of
the portfolio, peer group analysis, historical industry loss experience, and
current economic conditions.  The allowance for loan losses was $15.5 million,
or 1.50% of net loans receivable at September 30, 2006, compared to $13.2
million, or 1.52% of net loans receivable at September 30, 2005.  The
increased allowance level resulted from continued loan portfolio growth in the
higher-risk lending categories of construction and land development,
commercial real estate commercial business loans during the period, which
comprised $862.8 million, or 83.2% of the portfolio at September 30, 2006,
versus $710.4 million, or 81.8% at September 30, 2005.

17

<PAGE>



     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 Corporation considers the
allowance level to be appropriate, as a result of the changing portfolio mix
and the current economic environment.

     As of September 30, 2006, there were 17 loans on nonaccrual status and
two loans over ninety days delinquent and still accruing.  At September 30,
2006 total non-performing loans were $2.2 million.  The Bank had no real
estate owned at September 30, 2006.  Total non-performing assets represented
$2.2 million, or 0.18% of total assets at September 30, 2006 compared to $1.3
million or 0.12% of total assets at September 30, 2005.

                                                    As of September 30,
                                                   ----------------------
 Non-Performing Assets                                2006         2005
                                                   ----------   ---------
 (In thousands)

 Accruing loans - 90 days past due                 $      611   $      -
 Non-accrual loans                                      1,557      1,257
                                                   ----------   --------
 Total non-performing loans                             2,168      1,257
 Total non-performing loans/net loans                    0.21%      0.14%
 Real estate owned                                          -          -
                                                   ----------   --------
 Total non-performing assets                            2,168      1,257
                                                   ----------   --------
 Total non-performing assets/total assets                0.18%      0.12%

     Noninterest Income.  Noninterest income for the three months ended
September 30, 2006 was unchanged at $1.4 million as compared to the same
period a year ago.  Service fee income increased 7.8% to $784,000 for the
quarter ended September 30, 2006 from $727,000 for the same quarter in the
prior period.  The primary reason for the increase was the implementation of
an overdraft protection service during July 2005, which, together with the
increase in deposits, resulted in increased fee income.  The net gain on the
sale of loans servicing released decreased to $206,000 for the quarter ended
September 30, 2006 from $306,000 in the comparable period one year ago. A
moderately more active mortgage market was the primary reason for the
increased amount in the prior year.  Other noninterest income for the quarter
increased 16.7% to $429,000 for the quarter ended September 30, 2006 from
$368,000 for the three months ended September 30, 2005.  The primary reason
for the increase from the prior period was additional income related to the
purchase of approximately $2.5 million of bank owned life insurance.

     Noninterest Expense.  Noninterest expense for the three months ended
September 30, 2006 increased 14.8% to $6.9 million from $6.0 million for the
comparable quarter one year ago.  Compensation and employee benefits increased
13.3% for the quarter ended September 30, 2006 to $4.1 million from $3.6
million for the comparable quarter one year ago.  Building occupancy for the
quarter ended September 30, 2006 increased 23.9% to $1.0 million from $819,000
for the three months ended September 30, 2005.  Increases in compensation and
employee benefits and building and occupancy expenses resulted from the
opening a full service retail office in Lakewood in fiscal 2006 and a full
service regional facility in Everett, Washington in June 2006.  Other
noninterest expense increased 19.6% to $1.4 million from $1.1 million in the
quarter ended September 30, 2005 as a result of additional transfer agent and
investor relations expenses, and increased Business & Occupation tax due to
the shifting loan portfolio from non-taxable mortgage loans to taxable
commercial loans.

Comparison of Operating Results for the Six Months Ended September 30, 2006
and September 30, 2005
---------------------------------------------------------------------------

     General.  Net income increased 22.9% to $9.2 million for the six months
ended September 30, 2006 from $7.5 million for the six months ended September
30, 2005.  Diluted earnings per share for the six months ended September 30,
2006 was $0.74 on weighted average shares outstanding of 12,429,317, compared
to diluted earnings per share of $0.60 on weighted average shares of
12,592,693 for the six months ended September 30, 2005.

     Net Interest Income.  Net interest income before provision for loan
losses for the six months ended September 30, 2006 increased 22.7% to $25.8
million from $21.0 million for the comparable period in 2005.  Interest on
loans for the six months ended September 30, 2006 increased 38.2% to $42.2
million, from $30.5 million for the comparable quarter a year ago.  This
increase was a result of a combination of factors, including: 1) the growth in
loans receivable, as the Bank experienced significant loan growth during the
period, increasing the loan portfolio to $1.0 billion at September 30, 2006
compared to $867.7 million at September 30, 2005; and 2) an increasing Prime
lending rate.  Interest and dividends on investments and mortgage-backed
securities for the six months ended September 30, 2006 increased 18.3% to $2.0
million, from $1.7 million for the comparable quarter a year ago.  This
increase was a result of a higher level of investments and mortgage-backed
securities outstanding during the respective periods, as average total
investments increased 2.8% to $93.8 million at September 30, 2006 as compared
to $91.2 million at September 30, 2005. Also contributing to the increase was
the restructuring of approximately $13.0 million of the investment securities
portfolio during the quarter ended March 31, 2006. The proceeds from those
lower-yielding securities have been reinvested in highly rated,
higher-yielding investments.  Total

18

<PAGE>



interest income increased 37.2% to $44.2 million at September 30, 2006 from
$32.2 million in the comparable period one year ago.

     Total interest paid on deposits increased 61.0% to $14.5 million for the
six months ended September 30, 2006 from $9.0 million for the six months ended
September 30, 2005, as a result of significant growth in average deposits
outstanding to $874.9 million at September 30, 2006 compared to $767.6 million
at September 30, 2005.  Also contributing to the increase was the increasing
level of interest rates during the year which resulted in an increase in
interest expense, including interest paid on the Bank's deposits.  Interest on
borrowings increased 78.6% to $3.8 million during the six months ended
September 30, 2006, compared to $2.1 million for the comparable period one
year ago.  The increased expense in the current year was a result of a higher
level of average borrowings outstanding during the six months ended September
30, 2006 of $166.1 million compared to $125.0 million during the six months
ended September 30, 2005, along with the increasing rate environment.  The
Bank continues to carry wholesale borrowings in order to further leverage its
balance sheet and better manage its interest rate risk profile.

     The following tables are presented to further illustrate the changes in
the primary factors impacting the Bank's net interest income:

                                               For the six months
                                                 ended Sept 30,
Average balances:                             2006            2005
                                          -----------     -----------
 (In thousands)

  Loans                                   $   982,481     $   835,779
  Investments                                  93,827          91,253
                                          -----------     -----------
  Total interest-earning assets             1,076,308         927,032

  Deposits                                $   874,962     $   767,608
  Borrowings                                  166,065         125,005
                                          -----------     -----------
  Total interest-bearing liabilities        1,041,027         892,613

  Average assets                            1,180,235       1,027,160
  Average stockholders' equity                115,191         107,581

                                               For the six months
                                                 ended Sept 30,
Weighted average interest rates:              2006            2005
                                          -----------     -----------

  Yield on loans                               8.58%             7.30%
  Yield on investments                         4.32%             3.75%
                                          -----------     -----------
  Yield on interest-earning assets             8.21%             6.95%

  Cost of deposits                             3.32%             2.35%
  Cost of borrowings                           4.62%             3.44%
                                          -----------     -----------
  Cost of interest-bearing
   liabilities                                 3.53%             2.50%

  Net interest spread                          4.68%             4.44%
  Net interest margin                          4.80%             4.54%

19

<PAGE>



     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.

                                                    For the six months
                                                      ended Sept 30,
                                               ---------------------------
     Allowance for Loan Losses                     2006            2005
                                               -----------     -----------
     (In thousands)

     Allowance at beginning of period          $    14,184     $    11,767
     Provision for loan losses                       1,400           1,475
     Charge offs (net of recoveries)                   (73)            (81)
                                               -----------     -----------
     Allowance at end of period                $    15,511     $    13,161
     Allowance for loan losses as a
      percentage of net loans receivable
      at the end of the period                        1.50%           1.52%

     Net charge-offs as a percentage of
      average loans outstanding during
      the period                                     0.007%          0.010%

     The provision for loan losses was $1,400,000 for the six months ended
September 30, 2006 compared to $1,475,000 for the six months ended September
30, 2005.  These provisions reflect management's ongoing analysis of changes
in loan portfolio composition by collateral categories, overall credit quality
of the portfolio, peer group analysis, historical industry loss experience,
and current economic conditions.  The allowance for loan losses was $15.5
million, or 1.50% of net loans receivable at September 30, 2006, compared to
$13.2 million, or 1.52% of net loans receivable at September 30, 2005.  The
increased allowance level resulted from continued loan portfolio growth in the
higher-risk lending categories of construction and land development,
commercial real estate commercial business loans during the period, which
comprised $862.8 million, or 83.2% of the portfolio at September 30, 2006,
versus $710.4 million, or 81.8% at September 30, 2005.

     Noninterest Income.  Noninterest income for the six months ended
September 30, 2006 decreased 2.4% to $2.9 million as compared to $3.0 million
for the same period a year ago.  Service fee income increased 32.0% to $1.7
million for the six months ended September 30, 2006 from $1.3 million for the
same six months in the prior period.  The primary reason for the increase was
the implementation of an overdraft protection service during July 2005, which,
together with the increase in deposits, resulted in increased fee income.  The
net gain on the sale of loans servicing released decreased to $432,000 for the
six months ended September 30, 2006 from $603,000 in the comparable period one
year ago. A moderately more active mortgage market was the primary reason for
the increased amount in the prior year.  Other noninterest income decreased
22.6% to $801,000 for the six months ended September 30, 2006 from $1.0
million for the six months ended September 30, 2005.  The primary reason
for the decrease from the prior period was the recognition in the prior year
period of approximately $320,000 in profits on the real estate development
project from a joint venture of the Bank's wholly owned subsidiary, Westward
Financial Corp.  All lot sales have been concluded for this real estate joint
venture and, as a result of the current status of the development of future
lots, no sales activity is currently anticipated for fiscal 2007 from the
Bank's real estate joint venture activities.

     Noninterest Expense.  Noninterest expense for the six months ended
September 30, 2006 increased 13.3% to $13.4 million from $11.9 million for the
comparable six months one year ago.  Compensation and employee benefits
increased 13.0% for the six months ended September 30, 2006 to $8.0 million
from $7.1 million for the comparable six months one year ago.  Building
occupancy for the six months ended September 30, 2006 increased 20.2% to $2.0
million from $1.6 million for the six months ended September 30, 2005.
Increases in compensation and employee benefits and building and occupancy
expenses resulted from the opening a full service retail office in Lakewood in
fiscal 2006 and a full service regional facility in Everett, Washington in
June 2006.  Other noninterest expense increased 14.2% to $2.7 million from
$2.4 million in the six months ended September 30, 2005 as a result of
additional transfer agent and investor relations expenses, and increased
Business & Occupation tax due to the shifting loan portfolio from non-taxable
mortgage loans to taxable commercial loans.

20

<PAGE>


<TABLE>


Average Balances, Interest and Average Yields/Costs
---------------------------------------------------

     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.

                                                      For the six months ended September 30,
                                            ------------------------------------------------------------
                                                      2006                            2005
                                            ----------------------------    ----------------------------
                                                                 Average                        Average
                                            Average               Yield/    Average             Yield/
(In thousands)                              Balance    Interest    Cost     Balance  Interest    Cost
                                            --------- ----------  -------   -------- ---------- --------

                                         <c>        <c>        <c>       <c>      <c>        <c>
Interest-earning assets:
  Loans receivable                          $ 982,481  $  42,152   8.58%    $ 835,779 $ 30,490   7.30%
  Investment securities                        66,485      1,350   4.06        71,606    1,276   3.56
  Mortgage-backed securities                   27,342        674   4.93        19,647      436   4.44
                                            ---------  ---------   ----     --------- --------   ----
    Total interest-earning assets           1,076,308     44,176   8.21       927,032   32,202   6.95

Interest-bearing liabilities:
  Deposits                                    874,962     14,524   3.32       767,609    9,021   2.35
  Borrowings                                  166,065      3,837   4.62       125,005    2,149   3.44
                                            ---------  ---------   ----     --------- --------   ----
    Total interest-bearing liabilities      1,041,027     18,361   3.53       892,614   11,170   2.50
                                                       ---------                      --------
Net interest income                                    $  25,815                      $ 21,032
                                                       =========                      ========
Interest rate spread                                               4.68%                         4.44%
Net interest margin                                                4.80%                         4.54%

Ratio of average interest-earning
  assets to average interest-
  bearing liabilities                                            103.39%                       103.86%

</TABLE>
Rate/Volume Analysis
--------------------

     The table below sets forth certain information regarding changes in
interest income and interest expense for the Corporation 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).

                                          Six months ended September 30,
                                        ----------------------------------
                                                  2006 vs. 2005
                                        ----------------------------------
                                            Increase (Decrease) Due to
                                        ----------------------------------
                                                           Rate/
(In thousands)                          Volume    Rate    Volume   Total
                                        -------  ------- -------- --------
Interest income:
 Interest and fees on loans             $ 5,352  $ 5,368  $   942  $ 11,662
 Investment securities and other
  interest-bearing securitites               48      257        7       312
                                        -------  -------  -------  --------

Total interest-earning assets           $ 5,400  $ 5,625  $   949  $ 11,974
                                        =======  =======  =======  ========
Interest expense:
 Deposit accounts                       $ 1,262  $ 3,721  $   520  $  5,503
 Borrowings                                 706      739      243     1,688
                                        -------  -------  -------  --------

Total interest-bearing liabilities      $ 1,968  $ 4,460  $   763  $  7,191
                                        =======  =======  =======  ========

21

<PAGE>



Liquidity and Capital Resources
-------------------------------

     The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements.  At September 30, 2006, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with an amortized cost of $52.0 million.

     As of September 30, 2006 the total amortized cost of investments and
mortgage-backed securities was $78.8 million compared to a market value of
$84.6 million with an unrealized gain of $5.8 million.  As of March 31, 2006,
the total amortized cost of investments and mortgage-backed securities was
$79.2 million, compared to a market value of $84.4 million with an unrealized
gain of $5.2 million.   The Bank foresees no factors that would im air its
ability to hold debt securities to maturity.

     As indicated on the Corporation's Consolidated Statement of Cash Flows,
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 Corporation'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 Corporation's options
include, but are not necessarily limited to: (i) selling additional loans in
the secondary market; (ii) entering into reverse repurchase agreements; (iii)
borrowing from the FHLB of Seattle; (iv) accepting additional jumbo, brokered
and/or public funds deposits; or (v) accessing the discount window of the
Federal Reserve Bank of San Francisco.

     Stockholders' equity as of September 30, 2006 was $117.9 million, or 9.6%
of assets, compared to $113.3 million, or 10.2% of assets at March 31, 2006.
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 September 30, 2006 was 11.8%, compared to
12.6% as of March 31, 2006.  These figures are well above the well-capitalized
minimum of 10% set by the FDIC.

     The Corporation has conducted various stock buy-back programs since
August 1996.  In March 2006, the Board of Directors approved a new stock
repurchase plan that continues through the 2007 fiscal year, allowing the
Corporation to repurchase up to 5% of total shares outstanding, or
approximately 625,000 shares, as restated.  This marked the Corporation's
seventh stock repurchase plan.  During the quarter ended September 30, 2006,
the Corporation repurchased 25,046 shares at an average price of $23.63 and
for the six-month period ended September 30, 2006, the Corporation repurchased
115,980 shares at an average price of $19.61.  All per share data and stock
prices have been adjusted to reflect the 5-for-4 stock split, paid in the form
of a 25% stock dividend on October 23, 2006.

     Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock is perceived to contribute to the
overall growth of shareholder value.   The number of shares of stock to be
repurchased and the price to 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 value and/or
earnings per share of the remaining outstanding shares, 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 Corporation's capital or liquidity position.

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 September 30, 2006, the
Corporation had no significant off-balance sheet derivative financial
instruments, nor did it have a trading portfolio of investments.  At September
30, 2006, 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,
2006.

22

<PAGE>




Item 4.   Controls and Procedures

     An evaluation of the Corporation's disclosure controls and procedures (as
defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the
"Act")) was carried out under the supervision and with the participation of
the Corporation's Chief Executive Officer, Chief Financial Officer, and
several other members of the Corporation's senior management as of the end of
the period preceding the filing date of this quarterly report.  The
Corporation's Chief Executive Officer and Chief Financial Officer concluded
that, as of September 30, 2006, the Corporation's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Corporation in the reports it files or submits under the Act
is (i) accumulated and communicated to the Corporation's management (including
the Chief Executive Officer and Chief Financial Officer) in a timely manner,
and (ii) recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms.

     In the quarter ended September 30, 2006, the Corporation did not make any
changes in its internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, the Corporation's internal control over financial
reporting.  While the Corporation believes the present designs of its
disclosure controls and procedures and internal control over financial
reporting are effective to achieve their goals, future events affecting its
business may cause the Corporation to modify its disclosure controls and
procedures and/or internal control over financial reporting.

     The Corporation does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all
error and fraud.  A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met.  Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Corporation have been detected.  These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control.  The design of any control procedure is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate.  Because of the inherent limitations in a
cost-effective control procedure, misstatements due to error or fraud may
occur and not be detected.


23

<PAGE>



PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings
               Horizon Financial Corporation has certain litigation and/or
               settlement negotiations in progress resulting from activities
               arising from normal operations.  In the opinion of management,
               none of these matters are likely to have a materially adverse
               effect on the Corporation's financial position or results of
               operation.

Item 1A.  Risk Factors

There have been no material changes in the risk factors previously disclosed
in the Corporation's Annual Report on Form 10-K for the year ended March 31,
2006.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation's common stock is traded on the NASDAQ Global Securities
Market under the symbol "HRZB".  As of November 1, 2006, there were 12,268,852
shares of common stock outstanding.

Stock Repurchases

     Bank holding companies, except for certain "well-capitalized" and highly
rated 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
if 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.

     The Corporation is "well-capitalized" in accordance with regulatory
standards.  The Corporation has had various stock buy-back programs since
August 1996.  In March 2006, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2007 fiscal year, allowing the
Corporation to repurchase up to 5% of total shares outstanding, or
approximately 625,000 shares, as restated.  This marked the Corporation's
seventh stock repurchase plan.  During the quarter ended September 30, 2006,
the Corporation repurchased 25,046 shares at an average price of $23.63 and
for the six-month period ended September 30, 2006, the Corporation repurchased
115,980 shares at an average price of $19.62.  All per share data and stock
prices have been adjusted to reflect the 5-for-4 stock split, paid in the form
of a 25% stock dividend on October 23, 2006.

     The following table sets forth information, as adjusted, about the
Corporation's purchases of its outstanding Common Stock during the quarter
ended September 30, 2006.

                                                                (d) Maximum
                                                    (c) Total    Number (or
                                                    Number of   approximate
                                                       Shares  Dollar Value)
                                                    (or Units) of shares (or
                                                    Purchased   Units) that
                       (a) Total                   as Part of    May Yet Be
                       Number of     (b) Average     Publicly     Purchased
                      Shares (or      Price Paid    Announced     Under the
                         Units)        Per Share     Plans or      Plans or
     Period            Purchased (1)   (or Unit)    Programs      Programs
------------------    ----------     -----------   ----------   --------------

July 1, 2006 -
 July 31, 2006                -               -        90,934        534,066
August 1, 2006 -
 August 31,2006               -               -        90,934        534,066
September 1, 2006 -
 September 30, 2006      25,046          23.632       115,980        509,020
Total                    25,046          23.632       115,980        509,020

(1) Of these shares, no shares were purchased other than through a publicly
    announced program.

Item 3.  Defaults Upon Senior Securities
           None

Item 4.  Submission of Matters to a Vote of Security Holders
           None

24

<PAGE>



Item 5.  Other Information
           None

Item 6.  Exhibits

(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)   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))
       (10.4)   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, 2004)
       (10.5)   Severance Agreement with Richard P. Jacobson (incorporated by
                reference to the Registrant's Quarterly Report on Form 10-Q
                for the quarter ended September 30, 2002)
       (10.6)   Severance Agreement with Steven L. Hoekstra (incorporated by
                reference to the Registrant's Quarterly Report on Form 10-Q
                for the quarter ended September 30, 2002)
       (10.7)   Stock Incentive Plan (incorporated by reference to Exhibit 99
                to the Registrant's Registration Statement on Form S-8 (File
                No. 333-127178))
       (10.8)   Form of Incentive Stock Option Award Agreement under the 2005
                Stock Incentive Plan (incorporated by reference to Exhibit
                99.1 contained in the Registrant's Current Report on Form 8-
                K dated July 27, 2005)
       (10.9)   Form of Non-qualified Stock Option Award Agreement under the
                2005 Stock Incentive Plan (incorporated by reference to
                Exhibit 99.1 contained in the Registrant's Current Report on
                Form 8-K dated July 27, 2005)
       (10.10)  Form of Restricted Stock Award Agreement under the 2005 Stock
                Incentive Plan (incorporated by reference to Exhibit 99.1
                contained in the Registrant's Current Report on Form 8-K dated
                July 27, 2005)
       (31.1)   Certification of Chief Executive Officer Pursuant to Section
                302 of the Sarbanes-Oxley Act
       (31.2)   Certification of Chief Financial Officer Pursuant to Section
                302 of the Sarbanes-Oxley Act
       (32)     Certification of Chief Executive Officer and Chief Financial
                Officer Pursuant to Section 906 of the Sarbanes-Oxley Act


25

<PAGE>



                              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
                              Chairman, President, and Chief Executive Officer


                          By: /s/Richard P. Jacobson
                              --------------------------------------
                              Richard P. Jacobson
                              Chief Financial Officer


                          Dated:  November  8, 2006
                                -------------------


26

<PAGE>



                            Exhibit Index
                            -------------

Exhibit 31.1  Certification of Chief Executive Officer Pursuant to Section 302
              of the Sarbanes-Oxley Act
Exhibit 31.2  Certification of Chief Financial Officer Pursuant to Section 302
              of the Sarbanes-Oxley Act
Exhibit 32    Certification of Chief Executive Officer and Chief Financial
              Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act


27

<PAGE>



                             Exhibit 31.1

                            Certification

I, V. Lawrence Evans, certify that:

   1.   I have reviewed this Quarterly Report on  Form 10-Q of Horizon
        Financial Corp;

   2.   Based on my knowledge, this report does not contain any untrue
        statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this report;

   3.   Based on my knowledge, the financial statements, and other financial
        information included in this report, fairly present in all material
        respects the financial condition, results of operations and cash flows
        of the registrant as of, and for, the periods presented in this
        report;

   4.   The registrant's other certifying officer(s) and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
        control over financial reporting (as defined in Exchange Act Rules
        13a-15(f) and 15d-15(f)) for the registrant and have:

        (a)  Designed such disclosure controls and procedures, or caused such
             disclosure controls and procedures to be designed under our
             supervision, to ensure that material information relating to the
             registrant, including its consolidated subsidiaries, is made
             known to us by others within those entities, particularly during
             the period in which this report is being prepared;

        (b)  Designed such internal control over financial reporting, or
             caused such internal control over financial reporting to be
             designed under our supervision, to provide reasonable assurance
             regarding the reliability of financial reporting and the
             preparation of financial statements for external purposes in
             accordance with generally accepted accounting principles.

        (c)  Evaluated the effectiveness of the registrant's disclosure
             controls and procedures and presented in this report our
             conclusions about the effectiveness of the disclosure controls
             and procedures, as of the end of the period covered by this
             report based on such evaluation; and

        (d)  Disclosed in this report any change in the registrant's internal
             control over financial reporting that occurred during the
             registrant's most recent fiscal quarter (the registrant's fourth
             fiscal quarter in the case of an annual report) that has
             materially affected, or is reasonably likely to materially
             affect, the registrant's internal control over financial
             reporting; and

   5.   The registrant's other certifying officer(s) and I have disclosed,
        based on our most recent evaluation of internal control over financial
        reporting, to the registrant's auditors and the audit committee of the
        registrant's board of directors (or persons performing the equivalent
        functions):

        (a)  All significant deficiencies and material weaknesses in the
             design or operation of internal control over financial reporting
             which are reasonably likely to adversely affect the registrant's
             ability to record, process, summarize and report financial
             information; and

        (b)  Any fraud, whether or not material, that involves management or
             other employees who have a significant role in the registrant's
             internal control over financial reporting.

Date:  November 8, 2006
                                     /s/V. Lawrence Evans
                                     ---------------------------------------
                                     V. Lawrence Evans
                                     Chairman, President, and Chief Executive
                                     Officer

28

<PAGE>




                             Exhibit 31.2

                            Certification

I, Richard P. Jacobson, certify that:

   1.   I have reviewed this Quarterly Report on  Form 10-Q of Horizon
        Financial Corp;

   2.   Based on my knowledge, this report does not contain any untrue
        statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this report;

   3.   Based on my knowledge, the financial statements, and other financial
        information included in this report, fairly present in all material
        respects the financial condition, results of operations and cash flows
        of the registrant as of, and for, the periods presented in this
        report;

   4.   The registrant's other certifying officer(s) and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
        control over financial reporting (as defined in Exchange Act Rules
        13a-15(f) and 15d-15(f)) for the registrant and have:

        (a)  Designed such disclosure controls and procedures, or caused such
             disclosure controls and procedures to be designed under our
             supervision, to ensure that material information relating to the
             registrant, including its consolidated subsidiaries, is made
             known to us by others within those entities, particularly during
             the period in which this report is being prepared;

        (b)  Designed such internal control over financial reporting, or
             caused such internal control over financial reporting to be
             designed under our supervision, to provide reasonable assurance
             regarding the reliability of financial reporting and the
             preparation of financial statements for external purposes in
             accordance with generally accepted accounting principles.

        (c)  Evaluated the effectiveness of the registrant's disclosure
             controls and procedures and presented in this report our
             conclusions about the effectiveness of the disclosure controls
             and procedures, as of the end of the period covered by this
             report based on such evaluation; and

        (d)  Disclosed in this report any change in the registrant's internal
             control over financial reporting that occurred during the
             registrant's most recent fiscal quarter (the registrant's fourth
             fiscal quarter in the case of an annual report) that has
             materially affected, or is reasonably likely to materially
             affect, the registrant's internal control over financial
             reporting; and

   5.   The registrant's other certifying officer(s) and I have disclosed,
        based on our most recent evaluation of internal control over financial
        reporting, to the registrant's auditors and the audit committee of the
        registrant's board of directors (or persons performing the equivalent
        functions):

        (a)  All significant deficiencies and material weaknesses in the
             design or operation of internal control over financial reporting
             which are reasonably likely to adversely affect the registrant's
             ability to record, process, summarize and report financial
             information; and

        (b)  Any fraud, whether or not material, that involves management or
             other employees who have a significant role in the registrant's
             internal control over financial reporting.

Date: November 8, 2006
                                    /s/Richard P. Jacobson
                                    -----------------------------------
                                    Richard P. Jacobson
                                    Chief Financial Officer, EVP

29

<PAGE>



                               Exhibit 32

   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 of
Form 10-Q, that:

      1. the report fully complies with the requirements of Sections 13(a) and
         15(d) of the Securities Exchange Act of 1934, as amended, and

      2. 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
Chairman, President, and Chief               Chief Financial Officer
  Executive Officer

Dated:  November 8, 2006


30

<PAGE>