SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-Q

                                   (Mark One)

[X]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
        Exchange Act of 1934

                For the quarterly period ended June 30, 2002
                                               -------------

                                      OR

[ ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities
        and Exchange Act of 1934

        For the transition period from                to
                                       -------------     -------------

                          Commission file number 0-27062

                              Horizon Financial Corp.
                              -----------------------
              (Exact name of registrant as specified in its charter)

                       Chartered by the State of Washington
                       ------------------------------------
          (State or other jurisdiction of incorporation or organization)

                                  91-1695422
                                  ----------
                       (IRS Employer Identification No.)

                            1500 Cornwall Avenue
                            Bellingham, Washington
                            ----------------------
                    (Address of principal executive offices)

                                    98225
                                    -----
                                 (Zip Code)

        Registrant's telephone number including area code:     (360) 733-3050
                                                               ---------------
        Indicate by check mark whether the registrant (1) has filed all
        reports required to be filed by Section 13 or 15(d) of the Securities
        Exchange Act of 1934 during the preceding 12 months (or for such
        shorter period that the registrant was required to file such reports),
        and (2) has been subject to such filing requirements for the past 90
        days.

                                  YES   X   NO
                                       ---

      As of June 30, 2002, 10,690,871 common shares, as restated for the 25%
      stock split declared June 25, 2002, $1.00 par value, were outstanding.

<PAGE>



                               HORIZON FINANCIAL CORP.

INDEX                                                              PAGE
-----                                                              ----

PART I      FINANCIAL INFORMATION

Item 1      Financial Statements (Unaudited)

              Independent Accountant's Report                       3

              Consolidated Statements of Financial Condition        4

              Consolidated Statements of Income                     5

              Consolidated Statements of Stockholders' Equity       6

              Consolidated Statements of Cash Flows                 7

              Notes to Consolidated Financial Statements            8

Item 2      Management's Discussion and Analysis of Financial
              Condition and Results of Operations                   9-14

Item 3      Quantitative and Qualitative Disclosures About
              Market Risk                                          14

PART II     OTHER INFORMATION

Item 1      Legal Proceedings                                      15

Item 2      Changes in Securities                                  15

Item 3      Defaults Upon Senior Securities                        15

Item 4      Submission of Matters to a Vote of Security Holders    15

Item 5      Other Information                                      15

Item 6      Exhibits and Reports on Form 8-K                       15

            SIGNATURES

2

<PAGE>



                      INDEPENDENT ACCOUNTANT'S REPORT

Board of Directors and Stockholders'
Horizon Financial Corp.

We have reviewed the accompanying consolidated statements financial condition
of Horizon Financial Corporation and subsidiaries as of June 30, 2002, and the
related consolidated statements of income, stockholders' equity and cash flows
for the three months ended June 30, 2002 and 2001.  These financial statements
are the responsibility of the company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial condition of Horizon Financial Corporation and subsidiaries as of
March 31, 2002, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (which is not
presented herein), and in our report dated April 22, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated statement
of financial condition as of March 31, 2002, is fairly presented, in all
material respects, in relation to the consolidated statement of financial
condition from which it has been derived.

/s/ Moss Adams LLP

Bellingham, Washington
August 1, 2002

3

<PAGE>


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

                           HORIZON FINANCIAL CORP.
                Consolidated Statements of Financial Condition

                                     ASSETS
                                                June 30,        March 31,
                                                  2002            2002
                                              (unaudited)
                                             --------------  --------------
Cash and cash equivalents                    $   13,522,514  $   14,187,040
Interest-bearing deposits                        65,171,000      69,775,000
Investment securities
  Available-for-sale                             66,483,803      46,373,554
  Held-to-maturity                                  369,178         369,140
Mortgage-backed securities
  Available-for-sale                             32,392,103      29,987,703
  Held-to-maturity                                3,886,290       4,410,204
Federal Home Loan Bank Stock                      6,335,600       6,243,300
Loans receivable                                558,482,875     568,303,481
Loans held for sale                               2,091,520       3,295,900
Accrued interest and dividends receivable         4,573,106       4,495,360
Bank premises and equipment, net                 15,391,411      15,195,049
Real estate owned                                   -               289,429
Other assets                                     14,137,647       9,137,746
                                             --------------  --------------
TOTAL ASSETS                                 $  782,837,047  $  772,062,906
                                             ==============  ==============

                LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                     $  638,013,229  $  628,782,470
Accounts payable and other liabilities            7,840,026       7,955,100
Other borrowed funds                             28,801,187      29,120,729
Advances by borrowers for taxes and insurance       398,793       1,439,124
Income tax currently payable                      1,714,540         513,509
Net deferred income tax liabilities               2,503,346       2,071,613
Deferred compensation                             1,603,270       1,580,770
                                             --------------  --------------
      Total liabilities                         680,874,391     671,463,315
                                             --------------  --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
  Serial preferred stock, $1 par value,
    10,000,000 shares authorized; none
    issued or outstanding                           -              -
  Common stock, $1 par value, 30,000,000
    shares authorized; 10,690,871 and
    8,607,117 issued and outstanding,
    respectively                                 10,690,871       8,607,117
  Additional paid-in capital                     57,883,797      60,428,238
  Retained earnings                              28,686,619      27,700,939
  Unearned ESOP shares                             (288,413)       (288,413)
  Accumulated other comprehensive income          4,989,782       4,151,710
                                             --------------  --------------
      Total stockholders' equity                101,962,656     100,599,591
                                             --------------  --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $  782,837,047  $  772,062,906
                                             ==============  ==============

                      (See Notes to Financial Statements)

4

<PAGE>


                          HORIZON FINANCIAL CORP.
                CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

                                                      3  months ended
                                                          June 30,
                                                      2002           2001
                                               --------------  --------------
INTEREST INCOME
  Interest on loans                            $   11,072,655  $   12,452,158
  Investment and mortgage-backed securities         1,445,794       1,574,247
                                               --------------  --------------
    Total interest income                          12,518,449      14,026,405
                                               --------------  --------------
INTEREST EXPENSE
  Interest on deposits                              4,957,306       7,391,990
  Interest on other borrowings                        361,078         360,892
                                               --------------  --------------
    Total interest expense                          5,318,384       7,752,882
                                               --------------  --------------
    Net interest income                             7,200,065       6,273,523

PROVISION FOR LOAN LOSSES                             300,000         160,000
                                               --------------  --------------
    Net interest income after provision for
      loan losses                                   6,900,065       6,113,523
                                               --------------  --------------
NONINTEREST INCOME
  Service fees                                        556,628         592,470
  Other                                               431,769         148,225
  Net gain (loss) on sales of loans - servicing
    released                                          404,852         302,656
  Net gain (loss) on sales of loans - servicing
    retained                                           63,539        (302,692)
  Net gain on sale of investment securities            62,222         118,935
                                               --------------  --------------
    Total noninterest income                        1,519,010         859,594
                                               --------------  --------------
NONINTEREST EXPENSE
  Compensation and employee benefits                2,244,358       1,878,811
  Building occupancy                                  589,527         576,917
  Other expenses                                      867,907         662,994
  Data processing                                     247,626         234,649
  Advertising                                         214,372         174,585
                                               --------------  --------------
    Total noninterest expense                       4,163,790       3,527,956
                                               --------------  --------------

INCOME BEFORE PROVISION FOR INCOME TAX              4,255,285       3,445,161

PROVISION FOR INCOME TAX                            1,401,031       1,166,076
                                               --------------  --------------
NET INCOME                                     $    2,854,254   $   2,279,085
                                               ==============  ==============
BASIC EARNINGS PER SHARE                       $          .27   $         .21*
                                               ==============  ==============
DILUTED EARNINGS PER SHARE                     $          .26   $         .20*
                                               ==============  ==============

*Restated for 25% stock split declared June 25, 2002.

                       (See Notes to Financial Statements)
5

<PAGE>


<PAGE>
<TABLE>

                                                          HORIZON FINANCIAL CORP.
                                              Consolidated Statements of Stockholders' Equity
                                                  3 Months Ended June 30, 2002 and 2001
                                                               (unaudited)

                               Common Stock
                            ----------------------   Additional                  Unearned         Other
                            Number of                  Paid-In       Retained      ESOP       Comprehensive
                             Shares      At Par        Capital       Earnings     Shares       Income (Loss)
                            ---------  -----------   -----------   -----------   ---------     -------------


                         <c>        <c>           <c>           <c>           <c>           <c>
BALANCE, March 31, 2001     8,861,238  $ 8,861,238   $62,380,016   $23,046,017   $(360,517)    $3,982,603

Comprehensive income
 Net income                         -            -             -     2,279,085           -              -
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net of taxes
   of $(30,389)                     -            -             -             -           -        (58,990)
  Total other comprehensive
    income                          -            -             -             -           -              -
 Comprehensive income               -            -             -             -           -              -
Unearned ESOP shares                -            -             -             -           -              -
Cash dividends on common stock
 at $.12 per share                  -            -             -    (1,061,302)          -              -
15% stock dividend adjustment     424          424         4,251        (4,675)          -              -
Stock options exercised         4,724        4,724        32,891             -           -              -
Treasury stock purchased            -            -             -             -           -              -
Retirement of treasury stock  (22,200)     (22,200)     (164,546)      (60,380)          -              -
                            ---------   ----------   -----------   -----------   ---------     ----------
BALANCE, June 30, 2001      8,844,186   $8,844,186   $62,252,612   $24,198,745   $(360,517)    $3,923,613
                            =========   ==========   ===========   ===========   =========     ==========

BALANCE, March 31, 2002     8,607,117   $8,607,117   $60,428,238   $27,700,939   $(288,413)    $4,151,710
Comprehensive income
 Net income                         -            -             -     2,854,254           -              -
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net of taxes
   of $431,734                      -            -             -             -            -       838,072
  Total other comprehensive
   income                           -            -             -             -            -             -
 Comprehensive income               -            -             -             -            -             -
Cash dividends on common stock
 at $.11 per share                  -            -             -    (1,176,845)           -             -
25% stock split             2,138,174    2,138,174    (2,138,174)            -            -             -
Stock options exercised        56,960       56,960       373,662             -            -             -
Dividend reinvestment plan      8,420        8,420       108,028             -            -             -
Treasury stock purchased            -            -             -             -            -             -
Retirement of treasury stock (119,800)    (119,800)     (887,957)     (691,729)           -             -
                           ----------  -----------   -----------   -----------    ---------    ----------
BALANCE, June 30, 2002     10,690,871  $10,690,871   $57,883,797   $28,686,619    $(288,413)   $4,989,782
                           ==========  ===========   ===========   ===========    =========    ==========

</TABLE>

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


                            <c>         <c>             <c>
BALANCE, March 31, 2001        $       -   $ 97,909,357
Comprehensive income
 Net income                            -      2,279,085    $ 2,279,085
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net of taxes
   of $(30,389)                        -        (58,990)       (58,990)
                                                           -----------
  Total other comprehensive
    income                             -              -        (58,990)
                                                           -----------
 Comprehensive income                  -              -    $ 2,220,095
                                                           ===========
Unearned ESOP shares                   -              -
Cash dividends on common stock
 at $.12 per share                     -     (1,061,302)
15% stock dividend adjustment          -              -
Stock options exercised                -         37,615
Treasury stock purchased        (247,126)      (247,126)
Retirement of treasury stock     247,126              -
                             -----------   ------------
BALANCE, June 30, 2001       $         -   $ 98,858,639
                             ===========   ============

BALANCE, March 31, 2002      $         -   $100,599,591
Comprehensive income
 Net income                            -      2,854,254    $ 2,854,254
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net of taxes
   of $431,734                         -        838,072        838,072
                                                           -----------
  Total other comprehensive
   income                              -              -        838,072
                                                           -----------
 Comprehensive income                  -              -    $ 3,692,326
                                                           ===========
Cash dividends on common stock
 at $.11 per share                     -     (1,176,845)
25% stock split                        -              -
Stock options exercised                -        430,622
Dividend reinvestment plan             -        116,448
Treasury stock purchased      (1,699,486)    (1,699,486)
Retirement of treasury stock   1,699,486              -
                             -----------   ------------
BALANCE, June 30, 2002       $         -   $101,962,656
                             ===========   ============

                                       (See Notes to Financial Statements)

</TABLE>

6

<PAGE>



                         HORIZON FINANCIAL CORP.
                  CONSOLIDATED STATEMENT OF CASH FLOWS
                                                        3 Months Ended
                                                           June 30,
                                                       2002          2001
                                                  -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                      $ 2,854,254    $ 2,279,085
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                       282,842        459,623
  Stock dividends   Federal Home Loan Bank stock      (92,300)       (93,400)
  Provision for loan losses                           300,000        160,000
Changes in assets and liabilities
  Interest and dividends receivable                   (77,746)        28,816
  Interest payable                                    (25,152)       (27,879)
  Net change in loans held for sale                 1,204,380       (650,415)
  Federal income tax (receivable) payable           1,201,031      1,166,076
  Other assets                                     (4,999,901)       (80,490)
  Other liabilities                                (1,250,760)      (467,801)
                                                  -----------    -----------
    Net cash flows from operating activities         (603,352)     2,773,615
                                                  -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing deposits, net      4,604,000    (45,555,000)
  Purchases of investment securities - available-
    for-sale                                      (19,200,995)    (1,000,000)
  Proceeds from sales and maturities of
    investment securities - available-for-sale        -              468,218
  Purchases of mortgage-backed securities -
    available-for-sale                             (5,511,034)       -
  Proceeds from maturities of mortgage-backed
    securities - available-for-sale                 3,467,146     19,371,605
  Proceeds from maturities of mortgage-backed
    securities - held-to-maturity                     523,914        467,057
  Purchase of Federal Home Loan Bank stock            -              -
  Net change in loans                               9,495,891     17,507,000
  Purchases of bank premises and equipment           (454,489)       (88,590)
  Net change in other real estate owned               289,429        -
                                                  -----------    -----------
    Net cash flows from investing activities       (6,786,138)    (8,829,710)
                                                  -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                            9,230,759      7,829,261
  Advances from other borrowed funds                  -              -
  Repayments of other borrowed funds                 (319,542)       -
  Common stock issued, net                            547,070       (144,456)
  Cash dividends paid                              (1,033,837)      (924,650)
  Treasury stock purchased                         (1,699,486)      (247,126)
                                                  -----------    -----------
    Net cash flows from financing activities        6,724,964      6,513,029
                                                  -----------    -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS              (664,526)       456,934
CASH AND CASH EQUIVALENTS, beginning of period     14,187,040     11,947,606
                                                  -----------    -----------
CASH AND CASH EQUIVALENTS, end of period          $13,522,514    $12,404,540
                                                  ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest        $ 5,356,972    $ 7,780,761
                                                  ===========    ===========
  Cash paid during the period for income tax      $   200,000    $   -
                                                  ===========    ===========
              (See Notes to Financial Statements)

7

<PAGE>



                            HORIZON FINANCIAL CORP.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     THREE MONTHS ENDED JUNE 30, 2002
                                   (unaudited)

NOTE A - Basis of Presentation
------------------------------

     The consolidated financial statements for the three months ended June 30,
2002, include the accounts of Horizon Financial Corp. (the Corporation),
Horizon Bank (the Bank), and other subsidiaries of the Bank.  Significant
intercompany balances and transactions have been eliminated in consolidation.
The Corporation has engaged in no significant activity other than holding the
stock of the Bank.

     The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements. Changes in these estimates and assumptions are
considered reasonably possible and may have a material impact on the financial
statements and thus actual results could differ from the amounts reported and
disclosed herein.

     The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.  In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation are reflected in the interim financial
statements.  The results of operations for the periods ended June 30, 2002 and
2001 are not necessarily indicative of the operating results for the full
year.  For further information, refer to the consolidated financial statements
and footnotes thereto in the Horizon Financial Corp. annual report for the
year ended March 31, 2002.

NOTE B - Reclassification
-------------------------

     Certain reclassifications have been made to prior financial statements to
conform with current presentation.  Such reclassifications have no effect on
net income.

NOTE C - Net Income Per Share
-----------------------------

     Basic earnings per share for the three months ended June 30, 2002 and
2001 are calculated on the basis of 10,742,299 and 11,071,587 weighted average
shares outstanding. Diluted earnings per share for the three months ended June
30, 2002 and 2001 are calculated on the basis of 10,915,843 and 11,187,119
weighted average share outstanding, respectively.  Diluted EPS figures are
computed by determining the number of additional shares that are deemed
outstanding due to stock options and warrants under the treasury stock method.
All numbers have been restated to reflect the 25% stock split declared June
25, 2002.

8

<PAGE>



Item 2.               MANAGEMENT'S DISCUSSION AND ANALYSIS

     The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and its
subsidiary. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes contained herein.

Forward Looking Statements
--------------------------

     Management's Discussion and Analysis and other portions of this report
contain certain "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  This statement is for the express
purpose of availing Horizon Financial to the protections of such safe harbor
provisions of said Act with respect to all "forward looking statements."
Horizon Financial has used "forward looking statements" to describe future
plans and strategies, including expectations of Horizon Financial's potential
future financial results.  Management's ability to predict results or the
effect of future plans and strategies is inherently uncertain.  Factors that
could affect results include, but are not limited to: the future level of
interest rates, industry trends, general economic conditions, loan delinquency
rates, and changes in state and federal regulations.  These factors should be
considered when evaluating the "forward looking statements" and undue reliance
should not be placed on such statements.

General
-------

     Horizon Financial was formed under Washington law on May 22, 1995, and
became the holding company for Horizon Bank, effective October 13, 1995.
Effective June 19, 1999 the Corporation completed the acquisition of
Bellingham Bancorporation, whose wholly-owned subsidiary, Bank of Bellingham,
was merged with and into Horizon Bank.  At June 30, 2002, the Corporation had
total assets of $782.8 million, total deposits of $638.0 million and total
equity of $101.9 million.  The Corporation's business activities generally are
limited to passive investment activities and oversight of its investment in
the Bank.  Accordingly, the information set forth herein, including the
consolidated financial statements and related data, relates primarily to the
Bank and its subsidiary.

     The Bank was organized in 1922 as a Washington State chartered mutual
savings and loan association and converted to a federal mutual savings and
loan association in 1934.  In 1979, the Bank converted to a Washington State
chartered mutual savings bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC").  On August 12, 1986, the Bank
converted to a state chartered stock savings bank under the name "Horizon
Bank, a savings bank".  The Bank became a member of the Federal Home Loan Bank
("FHLB") of Seattle in December 1998.  Effective March 1, 2000, the Bank
changed its name to its current title, "Horizon Bank".

     The Bank's operations are conducted through 15 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington.  The acquisition of Bellingham Bancorporation increased Horizon
Financial's and Horizon Bank's presence in Whatcom County.  During fiscal
2000, the Bank opened an additional office in Whatcom County, located in the
Barkley Village area of Bellingham, in the northeast portion of the city.  In
addition to serving the growing population in this area, this serves as an
operation center to support additional growth for the

9
<PAGE>





Corporation.  The Bank also completed construction of a new office building at
Murphy's Corner near Mill Creek, which replaced the Bank's leased location in
that area.  During fiscal 2000, the Bank purchased a bank site in Marysville,
which will provide potential additional growth opportunities.  In Fiscal 2002,
the Bank acquired a bank site in Lynnwood, Washington.  The Bank is currently
working on remodeling and upgrading this building, and anticipates opening for
business in the fall of 2002.

     At its October 24, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 1,121,250 shares, as restated) of the
Corporation's outstanding Common Stock over a 24 month period.  During the
quarter ended June 30, 2002, the Corporation repurchased 149,750 shares of its
Common Stock, as restated, compared to the repurchase of 27,750 of Common
Stock, as restated, during the quarter ended June 30, 2001.  In total, the
Corporation had repurchased 704,159 shares, as restated, under this plan, as
of June 30, 2002.

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

     The primary business of the Bank is to acquire funds in the form of
deposits and wholesale funds, and to use the funds to make consumer, real
estate and commercial loans in the Bank's primary market area.  In addition,
the Bank invests in U.S. Government and federal agency obligations,
mortgage-backed securities, equity securities, and municipal securities.  The
Bank intends to continue to fund its assets primarily with retail deposits,
although FHLB advances, and other wholesale borrowings, may be used as a
supplemental source of funds.

     The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings.

     Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Bank's
profitability is also affected by the level of other income and expenses.
Other income includes income associated with the origination and sale of
mortgage loans, loan servicing fees and net gains and losses on sales of
interest-earning assets.  Other expenses include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses and other operating costs.  The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation and monetary and fiscal policies.

     The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to commercial lending,
home mortgage lending, consumer lending, small business lending and providing
quality financial services to local personal and business customers.  The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities;  (ii) continued efforts towards the origination of residential
mortgage loans, including one- to- four family residential construction loans;
(iii) providing high quality, personalized financial services to individuals
and business customers and communities served by its branch network; (iv)
selling fixed rate mortgages to the secondary market; (v) focusing on asset
quality; (vi) containing operating expenses; and (vii) maintaining capital in
excess of regulatory requirements combined with prudent growth.

10

<PAGE>




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

     Total consolidated assets for the Corporation as of June 30, 2002, were
$782,837,047, a slight increase from the March 31, 2002, level of
$772,062,906.  This increase in assets was due primarily to the growth in
available for sale investment securities, which increased 43.37% to
$66,483,803 from $46,373,554 at March 31, 2002.

     Total liabilities also increased slightly to $680,874,391 at June 30,
2002, from $671,463,315 at March 31, 2002.    This increase in liabilities was
due in large part to the growth in deposits, which increased 1.47% to
$638,013,229 from $628,782,470 at March 31, 2002.

     Shareholder equity at June 30, 2002 increased 1.35% to $101,962,656 from
$100,599,591 at March 31, 2002.  This increase was due primarily to the
increase in net income of $2,854,254 less dividends paid and shares
repurchased.  The Corporation remains strong in terms of its capital position,
with a shareholder equity-to-assets ratio of 13.02% at June 30, 2002, compared
to 13.03% at March 31, 2002.

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

     The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements.  At June 30, 2002, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $100,086,574.

     As of June 30, 2002, the total book value of investments and
mortgage-backed securities was $160,742,099 compared to a market value of
$168,552,838 with an unrealized gain of $7,810,739.  As of March 31, 2002 the
total book value of investments and mortgage-backed securities was
$144,625,129, compared to a market value of $151,111,830 with an unrealized
gain of $6,486,701.  The Bank foresees no factors that would impair its
ability to hold debt securities to maturity.

     The Bank's primary sources of funds are cash flow from operations, which
consist primarily of mortgage loan repayments, deposit increases, loan sales,
borrowings, and cash received from the maturity or sale of investment
securities.  The Bank's liquidity fluctuates with the supply of funds and
management believes that the current level of liquidity is adequate at this
time.  If additional liquidity is needed, the Bank's options include, but are
not necessarily limited to: 1) Selling additional loans in the secondary
market; 2) Entering into reverse repurchase agreements; 3) Borrowing from the
FHLB of Seattle; 4) Accepting additional jumbo and/or public funds deposits;
or 5) Accessing the discount window of the Federal Reserve Bank of San
Francisco.

     Shareholder's equity as of June 30, 2002 was $101,962,656, or 13.02% of
assets, compared to $100,599,591, or13.03% of assets at March 31, 2002.  The
Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well capitalized.  The Bank's total
risk-adjusted capital ratio as of June 30, 2002 was 20.16%, compared to 20.26%
as of March 31, 2002.  These figures are well above the well-capitalized
minimum of 10% required by the FDIC.

     The Corporation has been in various buy-back programs since August 1996.
At its October 24, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 1,121,250 shares, as restated) of the
Corporation's outstanding Common Stock over a 24 month period. During

11

<PAGE>




the quarter ended June 30, 2002, the Corporation repurchased 149,750 shares of
its common stock at an average price of $11.35 per share, as restated,
compared to the repurchase of 27,750 shares of Common Stock at an average
price of $8.91 per share, as restated, during the quarter ended June 30, 2001.
In total, the Corporation had repurchased 704,159 shares under this plan at an
average price of $9.66, as restated, as of June 30, 2002.

     Management intends to continue its stock buy-back programs from time to
time as long as repurchasing the stock contributes to the overall growth of
shareholder value.   The number of shares of stock that will be repurchased
and the price that will be paid is the result of many factors, several of
which are outside of the control of the Corporation. The primary factors,
however, are market and economic factors such as the price at which the stock
is trading in the market, the number of shares available in the market; the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment;  the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the Bank's
and the Corporation's liquidity and capital needs and regulatory requirements.
Presently, it is management's belief that purchases made under the current
Board approved plan will not materially affect the Bank's capital or liquidity
position.

12

<PAGE>




                         Comparative Results of Operations
                           For the Three Months Ended
                             June 30, 2002 and 2001

Net Interest Income
-------------------

     Net interest income for the three months ended June 30, 2002, increased
14.77% to $7,200,065 from $6,273,523 in the same time period of the previous
year.  Interest on loans for the quarter ended June 30, 2002, decreased 11.08%
to $11,072,655, from $12,452,158.  This decrease was due primarily to the
decrease in loans receivable resulting from the sale of mortgage loans in the
secondary market.  Interest and dividends on investments and mortgage-backed
securities decreased 8.16% to 1,445,794, from $1,574,247 for the comparable
quarter a year ago.  This decrease is due in part to he decline in short term
interest rates.  Total interest income decreased 10.75% to $12,518,449 from
14,026,405 due to the reasons stated above.

     Total interest paid on deposits decreased 32.94% to $4,957,306 from
$7,391,990.  This decrease in interest expense is due to an overall decline in
interest rates.  Interest on borrowings was little changed at $361,078 during
the quarter, compared to $360,892 for the comparable period one year ago.
During the quarter ended June 30, 2002, the Bank continued to carry wholesale
borrowings in order to further leverage its balance sheet and better manage
its interest rate risk profile.

Provision for losses on loans
-----------------------------

     Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered by management as adequate to
provide for known and inherent risks in the loan portfolio, based on
management's continuing analysis of factors underlying the quality of the loan
portfolio.  These factors include changes in portfolio size and composition,
actual loss experience, current economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans.

     The provision for loan losses was $300,000 for the quarter ended June 30,
2002 compared to $160,000 for the quarter ended June 30, 2001.  This increase
resulted from management's ongoing analysis of changes in loan portfolio
composition by collateral categories, overall credit quality of the portfolio,
peer group analysis, and current economic conditions.  The reserve for loan
losses was $6,146,517, or 1.10% of loans receivable at June 30, 2002, compared
to $5,129,059, or .88% of loans receivable at June 30, 2001.  The increased
allowance level resulted from continued loan portfolio growth in the
higher-risk lending categories of commercial and multi-family construction/
permanent loans and business loans during the period, which comprised $254.5
million, or 45.6% of the portfolio at June 30, 2002, versus $204.7 million, or
35.3% at June 30, 2001.  In addition, commercial and multi-family loans have
larger individual loan amounts, which have a greater single impact on the
total portfolio quality in the event of delinquency or default.  The Bank
considers these reserve levels to be appropriate, due to the uncertain
regional economic environment.  Northwest Washington's economy has been
adversely affected by a number of factors, including but not limited to
slowdowns in the aerospace, technology, and telecommunications industries.  In
addition, other local industries have been adversely affected by significantly
higher expenses for electricity.

     As of June 30, 2002, there were 9 loans in the Bank's portfolio over 90
days delinquent with balances totaling $450,634, which represented .06% of
total assets.

13

<PAGE>



Non Interest Income
-------------------

     Non interest income for the three months ended June 30, 2002, increased
76.71% to $1,519,010 from $859,594 for the same time period a year ago.
Service fee income decreased 6.05% to $556,628 from $592,470.  The net
gain/loss on the sale of loans servicing released showed a gain of $404,852 in
the current quarter, compared to $302,656 in the comparable period one year
ago.  In February of 2001, the Bank began selling many of its new long-term
fixed rate mortgages into the secondary market on a servicing released basis.
Separately, the net gain/loss on the sale of loans on a servicing retained
basis (loans sold from the Bank's portfolio) showed a gain of $63,539 during
the quarter, compared to a loss of $302,692 in the comparable period one year
ago. When the Bank sells loans, the gains or losses related to the loan
balances and the prices received in the secondary market are reflected as
non-interest income.  When the Bank sells low coupon, long-term fixed rate
mortgages to reduce its interest rate risk exposure, the non-interest income
portion of the income statement may show a loss, as was the case during the
quarter ended June 30, 2001.

     The net gain/loss on sales of investment securities decreased to $62,222
for the quarter ended June 30, 2002 from $118,935 for the comparable period
one year ago.  These gains in these periods were due primarily to the sale of
selected common stocks and mortgage backed securities from the Bank's
investment portfolio.  Other non-interest income for the quarter increased
191.29% to $431,769 from $148,225.  The primary reason for the increase in
fiscal 2003 is the recognition of income related to approximately $10.0
million in bank-owned life insurance which was acquired in late March/early
April 2002.  Also contributing to this increase was the recognition of
approximately $40,000 gain on the sale of real estate owned in April 2002.

Non Interest Expense
--------------------

     Non interest expense for the three months ended June 30, 2002, increased
18.02% to $4,163,790 from $3,527,956.  Compensation and employee benefits
increased 19.46% for the quarter ended June 30, 2002, to $2,244,358 from
$1,878,811.  The increase in compensation and employee benefits during the
quarter ended June 30, 2002 was primarily due to the overall growth in
employment at the Bank, including key additions to staff as the Bank continues
its efforts to enhance its commercial banking expertise.  Building occupancy
for the quarter ended June 30, 2002 increased slightly to $589,527 from
$576,917.  Data processing expenses increased 5.53% to $247,626 from $234,649.
This increase over the prior period is attributable to the overall growth of
the Bank.  Advertising expenses for the quarter ended June 30, 2002 increased
22.79% to $214,372 from $174,585. The increase in fiscal 2003 was due
primarily to the bank's additional marketing efforts to communicate its
expanded commercial product lines and services, the transition to a new
advertising and marketing agency, and the development of a new brand strategy
for the Bank.  Other non-interest expenses increased 30.91% to $867,907 from
$662,994 due to the overall growth of the bank, and various expenses related
to the creation and implementation of the Horizon Bank brand.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     The Corporation continues to be exposed to interest rate risk.
Currently, the Corporation's assets and liabilities are not materially exposed
to foreign currency or commodity price risk.  At June 30, 2002, the
Corporation had no off-balance sheet derivative financial instruments, nor did
it have a trading portfolio of investments.  At June 30, 2002, there were no
material changes in the Corporation's market risk from the information
provided in the Form 10-K for the fiscal year ended March 31, 2002.

14

<PAGE>



PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities

            None

Item 3.  Defaults Upon Senior Securities

            None

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

            None

Item 5.  Other Information

            None

Item 6.  Exhibits and Reports on Form 8-K

        (a)  Exhibits

             (3.1)   Articles of Incorporation of Horizon Financial, Corp.
                     (incorporated by reference to Exhibit 3.1 to the
                     Registrant's Current Report on Form 8-K dated October 13,
                     1995)
             (3.2)   Bylaws of Horizon Financial Corp. (incorporated by
                     reference to Exhibit 3.2 to the Registrant's Current
                     Report on Form 8-K dated October 13, 1995)
             (10.1)  Amended and Restated Employment Agreement with V.
                     Lawrence Evans (incorporated by reference to the
                     Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 1996)
             (10.2)  Deferred Compensation Plan (incorporated by reference to
                     the Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 1996)
             (10.3)  1986 Stock Option and Incentive Plan (incorporated by
                     reference to Exhibit 99.1 to the Registrant's
                     Registration Statement on Form S-8 (File No. 33-99780))
             (10.4)  1995 Stock Option Plan (incorporated by reference to
                     Exhibit 99.2 to the Registrant's Registration Statement
                     on Form S-8 (File No. 33-99780))
             (10.5)  Bank of Bellingham 1993 Employee Stock Option Plan
                     (incorporated by reference to Exhibit 99 to the
                     Registrant's Registration Statement on Form S-8 (File No.
                     33-88571))
             (10.6)  Severance Agreement with Dennis C. Joines (incorporated
                     by reference to the Registrant's Annual Report on Form
                     10-K for the year ended March 31, 2002)
             (10.7)  Severance Agreement with Richard P. Jacobson
             (10.8)  Severance Agreement with Steven L. Hoekstra
             (15)    Awareness Letter from Accountants

        (b)  Reports on Form 8-K:
             -------------------
             None

15

<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
                                    President and Chief Executive Officer


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

                                Dated: August 14, 2002

16

<PAGE>




     CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                         OF HORIZON FINANCIAL CORP.
           PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-Q, that:

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

     *   the information contained in the report fairly presents, in all
         material respects, the company's financial condition and results of
         operations.


/s/ V. Lawrence Evans                    /s/ Richard P. Jacobson
---------------------------------        ---------------------------------
V. Lawrence Evans                        Richard P. Jacobson
Chief Executive Officer                  Chief Financial Officer


Dated: August 14, 2002

<PAGE>



                              Exhibit 10.7
               Severance Agreement with Richard P. Jacobson

<PAGE>



                    CHANGE OF CONTROL /SEVERANCE AGREEMENT


     THIS CHANGE OF CONTROL/ SEVERANCE AGREEMENT (the "Agreement") is made and
entered into as of this 16th day of July, 2002 (the "Commencement Date"), by
and between HORIZON BANK, a savings bank chartered under the laws of the State
of Washington (the "Bank"), and Richard P. Jacobson (the "Executive").

     WHEREAS, the Executive is currently serving as Executive Vice President
and Chief Finance Officer; and has agreed to continue to serve in the employ
of the Bank; and

     WHEREAS, the Board of Directors of the Bank  recognizes the substantial
contribution the Executive has made to the Bank and wishes to provide
Executive with certain benefits for the period provided in this Agreement in
the event of  a change of control (as defined herein) of the Bank or of its
holding company, Horizon Financial Corp. (the "Holding Company");

     NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, the parties hereto agree as
follows:

     1.  Certain Definitions.
         -------------------

          (a)  The term "Change of Control" means: (i) an event of a nature
that would be required to be reported in response to Item 1(a) of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
(ii) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act,  other than the Holding Company, any Consolidated Subsidiaries
(as hereinafter defined), is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the
Bank or the Holding Company representing 25% or more of the combined voting
power of the Bank's or Holding Company's outstanding securities; (iii)
individuals who are members of the Board of Directors of the Holding Company
(the "Board") on the Commencement Date (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the Commencement Date whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an
Incumbent Board or who was appointed as a result of a change at the direction
of the Federal Reserve Board or the Federal Deposit Insurance Corporation
("FDIC"), shall be considered a member of the Incumbent Board; (iv) the
stockholders of the Holding Company approve a merger, consolidation or
acquisition of the Holding Company or the Bank, with or by any other
corporation or entity, other than (1) a merger, consolidation or acquisition
which would result in the voting securities of the Holding Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Holding Company or such surviving entity outstanding immediately after
such merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Holding Company or the Bank (or similar
transaction) in which no person (as hereinabove defined) acquires more than
25% of the combined voting power of the Holding Company's then outstanding
securities; or (v) the stockholders of the Holding Company approve a plan of
complete liquidation of the Holding Company or the Bank or an agreement for
the sale or disposition by the Holding Company of all or substantially all of
the Holding Company's or the

<PAGE>



Bank's assets (or any transaction having a similar effect); provided that the
term "Change of Control" shall not include an acquisition of securities by an
employee benefit plan of the Bank or the Holding Company or a change in the
composition of the Board at the direction of the Federal Reserve Board or the
FDIC.  Upon a Change of Control, the provisions hereof shall become
immediately operative.

          (b)  The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Holding Company that are part of the affiliated group (as
defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), without regard to subsection (b) thereof) that includes the Bank.

          (c)  The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including (without limitation) any of the following circumstances:

          (i)   a requirement that the Executive be based at any location not
                within 30 miles of the Executive's then existing job location,
                providing that such new location is not closer to Executive's
                home;
          (ii)  a material demotion, or loss of title or loss of significant
                authority of the Executive;
          (iii) a reduction in the Executive's salary or a material adverse
                change in the Executive's perquisites, benefits or vacation,
                other than as part of an overall program applied uniformly and
                with equitable effect to all members of the senior management
                of the Bank;
          (iv)  a successor bank or company fails or refuses to assume the
                Bank's obligations Under this Agreement, as required in
                Section 4(a) hereof; or
          (v)   any purported termination of the Executive's employment,
                except for Termination for Cause that is not effected pursuant
                to a Notice of Termination satisfying the requirements of
                Section 6 hereof (and, if applicable, the requirements of
                Section 1(d) hereof), which termination shall not be effective
                for purposes of this Agreement.

          (d)   The term "Termination for Cause" means termination of the
employment of the Executive because of the Executive's personal dishonesty,
incompetence,  willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties,
insubordination, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement or any other agreement
between Executive and the Bank or the Holding Company.  The Executive shall
not be entitled to any payment or benefit hereunder in the event a termination
occurs by reason of a voluntary retirement, voluntary termination other than
for reasons specified in Section 1(c) hereof, disability, or Termination for
Cause.

     2.  Term of the Agreement.
         ---------------------

          (a)  The term of this Agreement shall be a period of thirty-six
calendar months beginning on the Commencement Date.  Commencing on the first
anniversary date of this Agreement and continuing on each anniversary
thereafter, the term of the Agreement shall be extended for a period of one
year in addition to the remaining term, unless either party elects not to
extend this Agreement further by giving written notice thereof to the other
party, subject to earlier termination, as provided herein.

                                      2

<PAGE>



          (b)  Nothing in this Agreement shall be deemed to prohibit the Bank
at any time from terminating the Executive's employment during the term of
this Agreement with or without notice for any reason; provided, however, that
the relative rights and obligations of the Bank and the Executive in the event
of any such termination shall be determined under this Agreement.

     3.  Severance Benefits.
         ------------------

          (a)  If after a Change of Control, the Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate employment with the Bank for Good Reason within twelve (12)
months following a Change of Control, the Bank shall: (i) pay the Executive
(or in the event of Executive's subsequent death, Executive's beneficiary or
estate, as the case may be), as severance pay, a sum equal to 1.99 times
Executive's annual compensation.  For purposes of this Agreement, "annual
compensation" shall mean all wages, salary, bonus, and other compensation, if
any, paid by the Bank as consideration for the Executive's services during the
twelve (12) month period ending on the last day of the month preceding the
effective date of a Change of Control which is or would be includable in the
gross income of the Executive receiving the same for federal income tax
purposes.  Such amount shall be paid to Executive in a lump sum no later than
sixty (60) days after the date of Executive's termination; and (ii) cause to
be continued for twelve (12) months after the effective date of a Change of
Control, life, medical, dental, and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
the Executive prior to the effective date of a Change of Control, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees on a nondiscriminatory basis.

          (b)  Notwithstanding the provisions of Section 3(a) above, if a
payment to the Executive who is a "disqualified individual" shall be in an
amount which includes an "excess parachute payment," the payment hereunder to
the Executive shall be reduced to the maximum amount which does not include an
"excess parachute payment."  The terms "disqualified individual" and "excess
parachute payment" shall have the meaning defined in Section 280G of the Code.

          (c)  The Executive shall not be required to mitigate the amount of
any payment or benefit  provided for in Section 3(a) of this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in Section 3(a) of this Agreement be reduced by any
compensation earned or benefit received  by the Executive as the result of
employment by another employer.   This Agreement shall not be construed as a
contract of employment or as providing the Executive any right to be retained
in the employ of the Holding Company or the Bank or any affiliate thereof.

     4.  Assignment.
         ----------

          (a)  This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank shall require any successor or assignee of
(whether direct or indirect, by purchase, merger, consolidation, operation of
law or otherwise) to all or substantially all of the business and/or assets of
the Bank, to expressly assume and agree to perform the Bank's obligations
under this Agreement.

                                      3

<PAGE>



          (b)  This Agreement  shall be binding upon and inure to the benefit
of the Executive, Bank, and Holding Company, and their respective successors
and assigns.

     5.   Required Regulatory Provisions.  Any payments made to Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
compliance with 12 U.S.C. Section 1828(k) and any rules and regulations
promulgated thereunder, including 12 C.F.R. Part 359.

     6.  Delivery of Notices.
         -------------------

     For the purposes of this Agreement, all notices and other communications
to any party hereto shall be in writing and shall be deemed to have been duly
given when delivered or sent by certified mail, return receipt requested,
postage prepaid, to the party's address identified herein.  Any purported
termination by the Bank or the Executive in connection with a Change of
Control shall be communicated by a Notice of Termination to the other party.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which indicates the specific termination provision in this Agreement
and shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for the termination of Executive's employment under the
provision so indicated.

     7.  Amendments.  No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.

     8.   Headings.  The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.

     9.  Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

     10.  Governing Law. This Agreement shall be governed by the laws of the
State of Washington.

     11.  Arbitration.  Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by binding
arbitration, conducted before a panel of three arbitrators in a location
selected by the Executive within 50 miles of the location of the Bank, in
accordance with the rules of the American Arbitration Association then in
effect.  Judgment may be entered on the arbitrators' award in any court having
jurisdiction.

     12.  Reimbursement of Fees.  All reasonable legal fees and expenses paid
or incurred by Executive pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the Bank if
Executive is successful on the merits pursuant to an arbitration award or
legal judgment.

                                      4

<PAGE>




     IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

     THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH
MAY BE ENFORCED BY THE PARTIES.

Attest:                              HORIZON BANK

/s/Barbara Brown                     /s/V. Lawrence Evans
-------------------------------      ------------------------------------

                                     By: V. Lawrence Evans
                                        ---------------------------------

                                     Its: Chairman
                                         --------------------------------

                                     Address: 1500 Cornwall Avenue
                                             ----------------------------
                                              Bellingham, WA 98225
                                             ----------------------------

                                     EXECUTIVE

                                     /s/Richard P. Jacobson
                                     ------------------------------------

                                     Address: 1500 Cornwall Avenue
                                             ----------------------------
                                              Bellingham, WA 98225
                                             ----------------------------

                                 5

<PAGE>




                              Exhibit 10.8

                Severance Agreement with Steven L. Hoekstra

<PAGE>



                       CHANGE OF CONTROL /SEVERANCE AGREEMENT


     THIS CHANGE OF CONTROL/ SEVERANCE AGREEMENT (the "Agreement") is made and
entered into as of this 16th day of July, 2002 (the "Commencement Date"), by
and between HORIZON BANK, a savings bank chartered under the laws of the State
of Washington (the "Bank"), and Steven L. Hoekstra (the "Executive").

     WHEREAS, the Executive is currently serving as Executive Vice President
and Commercial Loan Manager,  and has agreed to continue to serve in the
employ of the Bank; and

     WHEREAS, the Board of Directors of the Bank  recognizes the substantial
contribution the Executive has made to the Bank and wishes to provide
Executive with certain benefits for the period provided in this Agreement in
the event of  a change of control (as defined herein) of the Bank or of its
holding company, Horizon Financial Corp. (the "Holding Company");

     NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, the parties hereto agree as
follows:

     1.  Certain Definitions.
         -------------------

          (a)  The term "Change of Control" means: (i) an event of a nature
that would be required to be reported in response to Item 1(a) of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
(ii) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act,  other than the Holding Company, any Consolidated Subsidiaries
(as hereinafter defined), is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the
Bank or the Holding Company representing 25% or more of the combined voting
power of the Bank's or Holding Company's outstanding securities; (iii)
individuals who are members of the Board of Directors of the Holding Company
(the "Board") on the Commencement Date (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the Commencement Date whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board or whose nomination for election by the Holding Company's
stockholders was approved by the nominating committee serving under an
Incumbent Board or who was appointed as a result of a change at the direction
of the Federal Reserve Board or the Federal Deposit Insurance Corporation
("FDIC"), shall be considered a member of the Incumbent Board; (iv) the
stockholders of the Holding Company approve a merger, consolidation or
acquisition of the Holding Company or the Bank, with or by any other
corporation or entity, other than (1) a merger, consolidation or acquisition
which would result in the voting securities of the Holding Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Holding Company or such surviving entity outstanding immediately after
such merger or consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Holding Company or the Bank (or similar
transaction) in which no person (as hereinabove defined) acquires more than
25% of the combined voting power of the Holding Company's then outstanding
securities; or (v) the stockholders of the Holding Company approve a plan of
complete liquidation of the Holding Company or the Bank or an agreement for
the sale or disposition by the Holding Company of all or substantially all of
the Holding Company's or the

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Bank's assets (or any transaction having a similar effect); provided that the
term "Change of Control" shall not include an acquisition of securities by an
employee benefit plan of the Bank or the Holding Company or a change in the
composition of the Board at the direction of the Federal Reserve Board or the
FDIC.  Upon a Change of Control, the provisions hereof shall become
immediately operative.

          (b)  The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Holding Company that are part of the affiliated group (as
defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), without regard to subsection (b) thereof) that includes the Bank.

          (c)  The term "Good Reason" means the occurrence, without the
Executive's express written consent, of a material diminution of or
interference with the Executive's duties, responsibilities or benefits,
including (without limitation) any of the following circumstances:

          (i)   a requirement that the Executive be based at any location not
                within 30 miles of the Executive's then existing job location,
                providing that such new location is not closer to Executive's
                home;
          (ii)  a material demotion, or loss of title or loss of significant
                authority of the Executive;
          (iii) a reduction in the Executive's salary or a material adverse
                change in the Executive's perquisites, benefits or vacation,
                other than as part of an overall program applied uniformly and
                with equitable effect to all members of the senior management
                of the Bank;
          (iv)  a successor bank or company fails or refuses to assume the
                Bank's obligations under this Agreement, as required in
                Section 4(a) hereof; or
          (v)   any purported termination of the Executive's employment,
                except for Termination for Cause that is not effected pursuant
                to a Notice of Termination satisfying the requirements of
                Section 6 hereof (and, if applicable, the requirements of
                Section 1(d) hereof), which termination shall not be effective
                for purposes of this Agreement.

          (d)   The term "Termination for Cause" means termination of the
employment of the Executive because of the Executive's personal dishonesty,
incompetence,  willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties,
insubordination, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement or any other agreement
between Executive and the Bank or the Holding Company.   The Executive shall
not be entitled to any payment or benefit hereunder in the event a termination
occurs by reason of a voluntary retirement, voluntary termination other than
for reasons specified in Section 1(c) hereof, disability, or Termination for
Cause.

     2.  Term of the Agreement.
         ---------------------

          (a)  The term of this Agreement shall be a period of thirty-six
calendar months beginning on the Commencement Date.  Commencing on the first
anniversary date of this Agreement and continuing on each anniversary
thereafter, the term of the Agreement shall be extended for a period of one
year in addition to the remaining term, unless either party elects not to
extend this Agreement further by giving written notice thereof to the other
party, subject to earlier termination, as provided herein.

                                       2

<PAGE>



          (b) Nothing in this Agreement shall be deemed to prohibit the Bank
at any time from terminating the Executive's employment during the term of
this Agreement with or without notice for any reason; provided, however, that
the relative rights and obligations of the Bank and the Executive in the event
of any such termination shall be determined under this Agreement.

     3.  Severance Benefits.
         ------------------

          (a)  If after a Change of Control, the Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate employment with the Bank for Good Reason within twelve (12)
months following a Change of Control, the Bank shall: (i) pay the Executive
(or in the event of Executive's subsequent death, Executive's beneficiary or
estate, as the case may be), as severance pay, a sum equal to 1.99 times
Executive's annual compensation.  For purposes of this Agreement, "annual
compensation" shall mean all wages, salary, bonus, and other compensation, if
any, paid by the Bank as consideration for the Executive's services during the
twelve (12) month period ending on the last day of the month preceding the
effective date of a Change of Control which is or would be includable in the
gross income of the Executive receiving the same for federal income tax
purposes.  Such amount shall be paid to Executive in a lump sum no later than
sixty (60) days after the date of Executive's termination; and (ii) cause to
be continued for twelve (12) months after the effective date of a Change of
Control, life, medical, dental, and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
the Executive prior to the effective date of a Change of Control, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees on a nondiscriminatory basis.

          (b)  Notwithstanding the provisions of Section 3(a) above, if a
payment to the Executive who is a "disqualified individual" shall be in an
amount which includes an "excess parachute payment," the payment hereunder to
the Executive shall be reduced to the maximum amount which does not include an
"excess parachute payment."  The terms "disqualified individual" and "excess
parachute payment" shall have the meaning defined in Section 280G of the Code.

          (c)  The Executive shall not be required to mitigate the amount of
any payment or benefit  provided for in Section 3(a) of this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in Section 3(a) of this Agreement be reduced by any
compensation earned or benefit received  by the Executive as the result of
employment by another employer.   This Agreement shall not be construed as a
contract of employment or as providing the Executive any right to be retained
in the employ of the Holding Company or the Bank or any affiliate thereof.

     4.  Assignment.
         ----------

          (a)  This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank shall require any successor or assignee of
(whether direct or indirect, by purchase, merger, consolidation, operation of
law or otherwise) to all or substantially all of the business and/or assets of
the Bank, to expressly assume and agree to perform the Bank's obligations
under this Agreement.

                                       3

<PAGE>



          (b)  This Agreement  shall be binding upon and inure to the benefit
of the Executive, Bank, and Holding Company, and their respective successors
and assigns.

     5.  Required Regulatory Provisions.  Any payments made to Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned upon
compliance with 12 U.S.C. Section 1828(k) and any rules and regulations
promulgated thereunder, including 12 C.F.R. Part 359.

     6.  Delivery of Notices.
         -------------------

     For the purposes of this Agreement, all notices and other communications
to any party hereto shall be in writing and shall be deemed to have been duly
given when delivered or sent by certified mail, return receipt requested,
postage prepaid, to the party's address identified herein.  Any purported
termination by the Bank or the Executive in connection with a Change of
Control shall be communicated by a Notice of Termination to the other party.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which indicates the specific termination provision in this Agreement
and shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for the termination of Executive's employment under the
provision so indicated.

     7.  Amendments.  No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.

     8.   Headings.  The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.

     9.  Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

     10.  Governing Law. This Agreement shall be governed by the laws of the
State of Washington.

     11.  Arbitration.  Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by binding
arbitration, conducted before a panel of three arbitrators in a location
selected by the Executive within 50 miles of the location of the Bank, in
accordance with the rules of the American Arbitration Association then in
effect.  Judgment may be entered on the arbitrators' award in any court having
jurisdiction.

     12.  Reimbursement of Fees.  All reasonable legal fees and expenses paid
or incurred by Executive pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the Bank if
Executive is successful on the merits pursuant to an arbitration award or
legal judgment.

                                      4

<PAGE>



     IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

     THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.

Attest:                              HORIZON BANK

/s/Barbara Brown                     /s/V. Lawrence Evans
-------------------------------      ------------------------------------

                                     By: V. Lawrence Evans
                                        ---------------------------------

                                     Its: Chairman
                                         --------------------------------

                                     Address: 1500 Cornwall Avenue
                                             ----------------------------
                                              Bellingham, WA 98225
                                             ----------------------------

                                     EXECUTIVE

                                     /s/Steven L. Hoekstra
                                     ------------------------------------

                                     Address: 1500 Cornwall Avenue
                                             ----------------------------
                                              Bellingham, WA 98225
                                             ----------------------------


                                       5

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                                  Exhibit 15

                      Awareness Letter from Accountants

<PAGE>