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 December 31, 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 filer      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 February 1, 2007, 12,261,629 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
                                                December 31,    March 31,
(In thousands, except share data)                   2006          2006
                                                ----------     ----------

Cash and cash equivalents                       $   29,785     $   24,190
Interest-bearing deposits                           10,832          9,439
Investment securities
  Available-for-sale                                55,676         60,137
  Held-to-maturity                                     370            370
Mortgage-backed securities
  Available-for-sale                                26,817         23,351
  Held-to-maturity                                     222            482
Federal Home Loan Bank Stock                         7,247          7,247
Loans receivable, net of allowance of loan
  losses of $15,969 at December 31 and $14,184
  at March 31                                    1,043,044        918,510
Loans held for sale, at fair value                   4,639          5,252
Investment in real estate in a joint venture        17,136         16,928
Accrued interest and dividends receivable            6,894          5,185
Bank premises and equipment, net                    27,011         26,317
Deferred income tax receivable                       2,124          2,254
Income tax receivable                                  837            808
Other assets                                        21,572         16,258
                                                ----------     ----------
TOTAL ASSETS                                    $1,254,206     $1,116,728
                                                ==========     ==========

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                        $  953,143     $  834,299
Accounts payable and other liabilities               8,996          6,919
Other borrowed funds                               149,004        141,561
Borrowing related to investment in real estate
  in a joint venture                                19,771         18,276
Advances by borrowers for taxes and insurance          220            467
Deferred compensation                                1,972          1,883
                                                ----------     ----------
     Total liabilities                           1,133,106      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; 12,266,629 and 9,898,168 issued
   and outstanding, respectively                    12,267          9,898
  Additional paid-in capital                        51,412         54,116
  Retained earnings                                 53,752         45,991
  Accumulated other comprehensive income, net
   of tax                                            3,669          3,318
     Total stockholders' equity                    121,100        113,323
                                                ----------     ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $1,254,206     $1,116,728
                                                ==========     ==========

             (See Notes to Consolidated Financial Statements)
2

<PAGE>

                         HORIZON FINANCIAL CORP.
              Consolidated Statements of Income (unaudited)

                                                        Three months ended
                                                            December 31,
                                                       --------    --------
(In thousands, except share data)                        2006         2005
                                                       --------    --------
INTEREST INCOME
  Interest on loans                                    $ 23,277    $ 17,328
  Interest on investments and mortgage-backed
    securities                                            1,022         866
                                                       --------    --------
   Total interest income                                 24,299      18,194
                                                       --------    --------
INTEREST EXPENSE
  Interest on deposits                                    8,715       5,321
  Interest on other borrowings                            2,162       1,283
                                                       --------    --------
   Total interest expense                                10,877       6,604
                                                       --------    --------
   Net interest income                                   13,422      11,590

PROVISION FOR LOAN LOSSES                                   450         800
                                                       --------    --------
   Net interest income after provision for loan losses   12,972      10,790
                                                       --------    --------
NONINTEREST INCOME
  Service fees                                              823         905
  Other                                                     420         377
Net gain on sales of loans - servicing released             162         208
  Net gain (loss) on sales of loans - servicing retained     14          (3)
  Net gain on sale of investment securities                   -           -
                                                       --------    --------
   Total noninterest income                               1,419       1,487
                                                       --------    --------
NONINTEREST EXPENSE
  Compensation and employee benefits                      4,159       3,786
  Building occupancy                                      1,099         957
  Other expenses                                          1,395       1,314
  Data processing                                           212         231
  Advertising                                               189         189
                                                       --------    --------
   Total noninterest expense                              7,054       6,477
                                                       --------    --------

NET INCOME BEFORE PROVISION FOR INCOME TAX                7,337       5,800

PROVISION FOR INCOME TAX                                  2,454       1,817
                                                       --------    --------
NET INCOME                                             $  4,883    $  3,983
                                                       ========    ========

BASIC EARNINGS PER SHARE                                $  0.40     $ 0.32*
                                                        =======     ======
DILUTED EARNINGS PER SHARE                              $  0.39     $ 0.32*
                                                        =======     ======

*restated for the 5 for 4 stock split in the form of a 25% stock dividend
distributed on October 23, 2006.

             (See Notes to Consolidated Financial Statements)

3

<PAGE>



                         HORIZON FINANCIAL CORP.
              Consolidated Statements of Income (unaudited)


                                                         Nine months ended
                                                            December 31,
                                                       --------    --------
(In thousands, except share data)                        2006         2005
                                                       --------    --------
INTEREST INCOME
  Interest on loans                                    $ 65,428    $ 47,818
Investment and mortgage-backed securities                 3,047       2,578
                                                       --------    --------
   Total interest income                                 68,475      50,396
                                                       --------    --------
INTEREST EXPENSE
  Interest on deposits                                   23,239      14,342
  Interest on other borrowings                            5,999       3,432
                                                       --------    --------
   Total interest expense                                29,238      17,774
                                                       --------    --------
   Net interest income                                   39,237      32,622

PROVISION FOR LOAN LOSSES                                 1,850       2,275
                                                       --------    --------
   Net interest income after provision for loan losses   37,387      30,347
                                                       --------    --------
NONINTEREST INCOME
  Service fees                                            2,474       2,155
  Other                                                   1,221       1,412
Net gain on sales of loans - servicing released             594         811
Net gain on sales of loans - servicing retained              22          49
  Net gain on sale of investment securities                  19          42
                                                       --------    --------
   Total noninterest income                               4,330       4,469
                                                       --------    --------
NONINTEREST EXPENSE
  Compensation and employee benefits                     12,133      10,843
  Building occupancy                                      3,068       2,595
  Other expenses                                          4,099       3,681
  Data processing                                           642         667
Advertising                                                 539         546
                                                       --------    --------
   Total noninterest expense                             20,481      18,332
                                                       --------    --------

NET INCOME BEFORE PROVISION FOR INCOME TAX               21,236      16,484

PROVISION FOR INCOME TAX                                  7,121       4,993
                                                       --------    --------
NET INCOME                                             $ 14,115    $ 11,491
                                                       ========    ========

BASIC EARNINGS PER SHARE                                 $ 1.15     $ 0.92*
                                                         ======     ======
DILUTED EARNINGS PER SHARE                               $ 1.14     $ 0.92*
                                                         ======     ======

*restated for the 5 for 4 stock split in the form of a 25% stock dividend
distributed on October 23, 2006.

             (See Notes to Consolidated Financial Statements)

4

<PAGE>


<TABLE>
                                     HORIZON FINANCIAL CORP.
                         Consolidated Statements of Stockholders' Equity
                           Nine Months Ended December 31, 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                          -            -             -       11,491            -             -
 Other comprehensive income
  Change in unrealized losses
   on available-for-sale
   securities, net taxes
   (benefit) of $(42)                -            -             -            -            -           (81)
 Total other comprehensive
  income                             -            -             -            -            -             -
Comprehensive income                 -            -             -            -            -             -
Cash dividends on common
 stock at $.425/sh                   -            -             -       (4,217)           -             -
Stock options exercised             59           59           291            -            -             -
Tax benefit associated with
 stock options                       -            -           136            -            -             -
Treasury stock purchased             -            -             -            -            -             -
Retirement of treasury stock      (203)        (203)       (1,155)      (2,769)           -             -
                                ------     --------     ---------    ---------     --------      --------
BALANCE, December 31, 2005       9,894     $  9,894     $  54,009    $  43,444     $    (72)     $  3,301
                                ======     ========     =========    =========     ========      ========

BALANCE, March 31, 2006          9,898     $  9,898     $  54,116    $  45,991     $      -      $  3,318
Comprehensive income
 Net income                          -            -             -       14,115            -             -
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net taxes
   of $188                           -            -             -            -            -           351
  Total other comprehensive
   income                            -            -             -            -            -             -
Comprehensive income                 -            -             -            -            -             -
Cash dividends on common stock
 at $.40/sh                          -            -             -       (4,541)           -             -
5 for 4 stock split in the
 form of a 25% stock dividend    2,453        2,453        (2,453)           -            -             -
Cash paid in leiu of fractional
 shares                              -            -             -          (10)           -             -
Stock options exercised             13           13            88            -            -             -
Stock award plan                     3            3           198            -            -             -
Tax benefit associated with
 stock options                       -            -            28            -            -             -
Treasury stock purchased             -            -             -            -            -             -
Retirement of treasury stock      (100)        (100)         (565)      (1,803)           -             -
                                ------     --------     ---------    ---------     --------      --------
BALANCE, December 31, 2006      12,267     $ 12,267     $  51,412    $  53,752     $      -      $  3,669
                                ======     ========     =========    =========     ========      ========

</TABLE>

<TABLE>
                                                              Total
                                         Treasury  Stock-     Compre-
                                          Stock    holders'   hensive
                                         at Cost   Equity     Income
                                         -------   --------   -------

                                      <c>       <c>        <c>
BALANCE, March 31, 2005                  $     -   $107,024
Comprehensive income
 Net income                                    -     11,491   $ 11,491
Other comprehensive income
 Change in unrealized losses
  on available-for-sale
  securities, net taxes
  (benefit) of $(42)                           -        (81)       (81)
 Total other comprehensive                                    --------
  income                                       -          -        (81)
                                                              --------
Comprehensive income                           -          -   $ 11,410
                                                              ========
Cash dividends on common
 stock at $.425/sh                             -     (4,217)
Stock options exercised                        -        350
Tax benefit associated with
 stock options                                 -        136
Treasury stock purchased                  (4,127)    (4,127)
Retirement of treasury stock               4,127          -
                                         -------   --------
BALANCE, December 31, 2005               $     -   $110,576
                                         =======   ========

BALANCE, March 31, 2006                  $     -   $113,323
Comprehensive income
 Net income                                    -     14,115   $ 14,115
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net taxes
   of $188                                     -        351        351
  Total other comprehensive                                    --------
   income                                      -          -        351
                                                              --------
Comprehensive income                           -          -   $ 14,466
                                                              ========
Cash dividends on common stock
 at $.40/sh                                    -     (4,541)
5 for 4 stock split in the
 form of a 25% stock dividend                  -          -
Cash paid in leiu of fractional
 shares                                        -        (10)
Stock options exercised                        -        101
Stock award plan                               -        201
Tax benefit associated with
 stock options                                 -         28
Treasury stock purchased                  (2,468)    (2,468)
Retirement of treasury stock               2,468          -
                                         -------   --------
BALANCE, December 31, 2006               $     -   $121,100
                                         =======   ========
</TABLE>

            (See Notes to Consolidated Financial Statements)
5

<PAGE>



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

                                                           Nine Months Ended
In thousands, except share data)                              December 31,
                                                           2006       2005
                                                        ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                            $  14,115  $  11,491
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                             1,382        776
  Stock dividends - Federal Home Loan Bank stock                -        (29)
  Stock award plan compensation                               198          -
  Provision for deferred income tax                           (59)         -
  Provision for loan losses                                 1,850      2,275
  Excess tax benefits from the exercise of stock
   options                                                    (28)      (136)
Changes in assets and liabilities
  Accrued interest and dividends receivable                (1,709)      (756)
  Interest payable                                          1,973      1,176
  Net change in loans held for sale                           613      2,167
  Federal income tax (receivable) payable                     (29)      (671)
  Other assets                                             (5,285)      (517)
  Other liabilities                                          (152)      (516)
                                                        ---------  ---------
    Net cash flows from operating activities               12,869     15,260
                                                        ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing deposits, net             (1,393)     2,293
  Purchases of investment securities - available-for-sale  (3,395)   (10,215)
  Proceeds from sales and maturities of
   investment securities - available-for-sale               8,189     19,133
  Purchases of mortgage-backed securities -
   available-for-sale                                     (10,467)   (12,124)
  Proceeds from maturities of mortgage-backed
   securities - available-for-sale                          7,207      5,459
  Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                              260        319
  Net change in loans                                    (126,357)   (89,670)
  Purchases of bank premises and equipment                 (2,103)    (2,886)
  Net change in investment in joint venture                  (208)       322
                                                        ---------  ---------
    Net cash flows from investing activities             (128,267)   (87,369)
                                                        ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                                  118,844     67,899
  Advances from other borrowed funds                      282,443    116,834
  Repayments of other borrowed funds                     (275,000)  (104,000)
  Advances on borrowing related to investment in real
   estate in a joint venture                                1,495      1,148
  Common stock issued, net                                     94        350
  Tax benefit associated with stock options                    28        136
  Cash dividends paid                                      (4,443)    (4,137)
  Treasury stock purchased                                 (2,468)    (4,127)
                                                        ---------  ---------
    Net cash flows from financing activities              120,993     74,103
                                                        ---------  ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS                     5,595      1,994
CASH AND CASH EQUIVALENTS, beginning of period             24,190     23,250
                                                        ---------  ---------
CASH AND CASH EQUIVALENTS, end of period                $  29,785  $  25,244
                                                        =========  =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest              $  27,264  $  16,598
                                                        =========  =========
  Cash paid during the period for income tax            $   7,173  $   5,665
                                                        =========  =========

                (See Notes to Consolidated Financial Statements)

6

<PAGE>



                           HORIZON FINANCIAL CORP.
             SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                THREE AND NINE MONTHS ENDED DECEMBER 31, 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 nine
months ended December 31, 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
nine month periods ended December 31, 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
$19.8 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 $139,000 and $95,000 for the
three months ended December 31, 2006 and 2005, respectively, and approximately
$393,000 and $243,000 for the nine months ended December 31, 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     Nine months ended
                                      December 31,         December 31,
                                  -------------------    ------------------
                                    2006       2005       2006        2005
                                  -------     -------    -------     ------
Basic weighted average shares
 outstanding                    12,266,820  12,388,784  12,297,369  12,438,447
Incremental shares from
 unexercised stock options
 and unvested restricted stock
 awards                            127,999     109,554     120,510     122,820
                                ----------  ----------  ----------  ----------
Diluted weighted average shares
 outstanding                    12,394,819  12,498,338  12,417,879  12,561,267
                                ==========  ==========  ==========  ==========

As of December 31, 2006 and 2005, there were no anti-dilutive shares
outstanding related to options to acquire the Corporation's common stock.

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

     On December 20, 2006, the Corporation announced a quarterly cash dividend
of 12.5 cents per share payable on February 2, 2007 to stockholders of record
on January 5, 2007.

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.  For the three and nine months ended
December 31, 2006, the Corporation recognized $82,000 and $193,000,
respectively, in stock option and restricted stock award compensation expense
as a component of salaries and benefits.  As of December 31, 2006, there was
approximately $548,000 of total unrecognized compensation cost related to
nonvested options and restricted 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 nine months ended December
31, 2006, was $4.18 per share, as adjusted.  There were no options or awards
granted during the three months ended December 31, 2006.  The following
assumptions were used in arriving at the fair value of options granted during
the nine months ended December 31:

                                          Nine Months Ended
                                          December 31, 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    Nine Months
                                                    ended           ended
(In thousands, except per share data)            Dec 31, 2005    Dec 31, 2005
                                                 ------------    ------------

Net income as reported                             $  3,983        $ 11,491
Additional compensation for fair value of
 stock options                                          (10)            (22)
                                                   --------        --------
Pro forma net income                               $  3,973        $ 11,469
                                                   ========        ========

Earnings per share
------------------
Basic
  As reported                                      $   0.32        $   0.92
                                                   ========        ========
  Pro forma                                        $   0.32        $   0.92
                                                   ========        ========
Diluted
  As reported                                      $   0.32        $  0.92
                                                   ========        ========
  Pro forma                                        $   0.32        $  0.91
                                                   ========        ========
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 summarizes stock option and award activity for the
nine months ended December 31, 2006 under both the 1995 and 2005 incentive
stock plans:

                              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                  (15,536)                       $  6.50
    Lapsed                       2,441         (2,441)        $ 15.30
    Expired                       (996)             -
                               -------        -------
  Balance, December 31, 2006   859,590        195,048
                               =======        =======

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 December 31, 2006 is as follows:

                          Options Outstanding            Options Exercisable
                   -----------------------------------  ----------------------
                                Weighted
                                 Average      Weighted                Weighted
     Range of                   Remaining     Average                  Average
     Exercise       Number     Contractual    Exercise    Number      Exercise
     Prices       Outstanding     Life        Price     Exercisable     Price
----------------  -----------  -----------   ---------  -----------   --------
$ 5.00 to $ 9.99    134,408    3.53 years     $ 6.69      134,408      $ 6.69
$10.00 to $14.99     10,000    6.41 years     $12.00        7,185      $11.90
$15.00 to $20.00     50,640    8.98 years     $17.99        9,123      $16.25

     At December 31, 2006, the aggregate intrinsic value of stock options
outstanding and stock options exercisable was $2.8 million and $2.6 million,
respectively.

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,
Washington, 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.  During the quarter ended December 31, 2006, the Bank
entered into a lease agreement to open a branch in Puyallup, Washington in the
spring of 2007 to expand its presence in Pierce County

     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.

11

<PAGE>



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 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 recently announced plans for an
additional office in Puyallup, Washington, expanding its presence in Pierce
County which will provide additional support to its Lakewood office.
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 reviews 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.  The results of this strategy are discussed in more detail in
the section entitled "Comparison of Operating Results for the Three and Nine
Months Ended December 31, 2006 and December 31, 2005".  On the liability side
of the balance sheet, the impact of these increasing rates has also impacted
the Bank's earnings.  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.

     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
increased the deposit related fee income and is discussed in more detail in
the section entitled "Comparison of Operating Results for the Three and Nine
Months Ended December 31, 2006 and December 31, 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

12

<PAGE>



efficiency initiative, soliciting input from all employees and implementing
many of the suggestions it received.  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
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 converting the
data 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 December 31, 2006, were
$1.3 billion, a 12.3% 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 13.6% to $1.0 billion at December 31, 2006 from $918.5 million
at March 31, 2006.  The growth in loans receivable was primarily attributable
to a $127.8 million, or 48.7%, 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.  Also
increasing during the period is the commercial loan category, as the Bank
continues to focus on increasing its commercial lines of credit balances to
diversify its loan portfolio and expand its relationships with businesses in
its markets.  Commercial real estate loans, primarily consisting of loans with
initial fixed rate periods of three to five years, declined during the period
as the Bank continued its trend away from the lower returns available in this
segment in favor of the returns available in the construction and land
development category.  One-to-four family mortgage loans increased slightly
during the period.  The Bank continued its practice of selling most of its
single-family fixed rate loan production into the secondary market.  The Bank
sold $62.0 million of real estate loans during the nine months ended December
31, 2006, compared to $82.5 million during the nine months ended December 31,
2005 due to an overall decline in activity from the Bank's single family
mortgage division.

The following is an analysis of the loan portfolio by major type of loans:

                                        December 31,        March 31,
(In thousands)                              2006              2006
                                         ----------         --------
1-4 mortgage loans
   1-4 family                            $  150,500         $148,515
   1-4 family construction                   26,220           20,971
   Less participations sold                 (56,541)         (56,546)
                                         ----------         --------
      Net 1-4 family mortgage loans         120,179          112,940
Construction and land development           390,112          262,358
Multi family residential                     51,504           70,080
Commercial real estate                      297,962          314,299
Commercial loans                            145,378          123,445
Home equity secured                          48,278           44,001
Other consumer loans                          5,600            5,571
                                         ----------         --------
      Subtotal                              938,834          819,754
                                         ----------         --------
Total loans receivable                    1,059,013          932,694
                                         ----------         --------
Less:
   Allowance for loan losses                (15,969)         (14,184)
                                         ----------         --------
   Net loans receivable                  $1,043,044         $918,510
                                         ==========         ========

Net residential loans                    $  119,164   11%   $111,967   12%
Net commercial loans                        142,695   14%    121,117   13%
Net commercial real estate loans (1)        728,150   70%    636,657   70%
Net consumer loans (2)                       53,035    5%     48,769    5%
                                         ----------  ---    --------  ---
                                         $1,043,044  100%   $918,510  100%
                                         ==========  ===    ========  ===

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

13

<PAGE>



     As reflected in the table above, approximately 70% 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 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 regularly review the appraisals 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:

                                      December 31, 2006     March 31, 2006
                                      -----------------   ------------------
(In thousands)                         Amount   Percent    Amount    Percent
                                      --------  -------   --------   -------

Speculative construction 1-4 family   $ 13,136    3.2%    $  8,675     3.1%
Custom construction 1-4 family          13,084    3.1       12,296     4.3
                                      --------  -----     --------   -----
  Total 1-4 family construction         26,220    6.3       20,971     7.4

Commercial speculative construction
 1-4 family                            153,460   36.9       95,534    33.7
Commercial construction multi family     9,532    2.3        6,927     2.4
Commercial construction                 68,059   16.3       56,328    19.9
Commercial residential land
 development                           159,061   38.2      103,569    36.6
                                      --------  -----     --------   -----
  Total construction and land
   development                         390,112   93.7      262,358    92.6

                                      --------  -----     --------   -----
  Total construction loans            $416,332  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 December 31, 2006:

                                                         Net       Estimated
                                          Amortized   Unrealized      Fair
(In thousands)                               Cost     Gain/(Loss)     Value
                                          ----------  -----------  ---------
AFS Securities
  State and political subdivisions and
   U.S. government agency securities       $ 43,642     $ (393)     $43,249
  Marketable equity securities                  323      6,233        6,556
  Mutual funds                                5,000       (131)       4,869
  Corporate debt securities                   1,002          -        1,002
  Mortage-backed securities and
    Collateralized mortgage obligations
     (CMOs)                                  26,819         (2)      26,817
                                           --------     ------      -------
    Total available-for-sale securities      76,786      5,707       82,493
                                           --------     ------      -------
HTM Securities
  State and political subdivisions and U.S.
   government agency securities                 370          2          372
  Mortgage-backed securities and
    CMOs                                        222         10          232
                                           --------     ------      -------
    Total held-to-maturity securities           592         12          604
                                           --------     ------      -------
    Total securities                       $ 77,378     $5,719      $83,097
                                           ========     ======      =======

                         Maturity Schedule of Securities at December 31, 2006
                         ----------------------------------------------------
                              Available-For-Sale        Held-To-Maturity
                             ---------------------   ---------------------
                             Amortized   Estimated   Amortized   Estimated
(In thousands)                  Cost     Fair Value     Cost     Fair Value
                             ---------   ----------  ---------   ----------
Maturities:
  Less than one year          $18,029     $17,973       $  8        $  8
  One to five years            20,791      20,478        554         558
  Over five to ten years       14,118      14,101          2           8
  Over ten years               18,525      18,516         28          30
                              -------     -------       ----        ----
                               71,463      71,068        592         604
                              -------     -------       ----        ----
Mutual funds and marketable
 equity securities (liquid)     5,323      11,425          -           -
                              -------     -------       ----        ----
Total investment securities   $76,786     $82,493       $592        $604
                              =======     =======       ====        ====

     Total liabilities increased 12.9% to $1.1 billion at December 31, 2006,
from $1.0 billion at March 31, 2006.  This increase in liabilities was
primarily the result of growth in deposits, which increased 14.2% to $953.1
million at December 31, 2006 from $834.3 million at March 31, 2006.    The
following is an analysis of the deposit portfolio by major type of deposit at
December 31, 2006 and March 31, 2006:

(In thousands)                                Dec 31, 2006     March 31, 2006
                                              ------------     --------------
Demand deposits
  Savings                                       $ 22,534         $ 30,808
  Checking                                        76,513           79,774
  Checking (noninterest-bearing)                  88,862           80,778

  Money Market                                   179,503          156,867
                                                --------         --------
                                                 367,412          348,227
                                                --------         --------
Time certificates of deposit
  Less than $100,000                             269,745          246,136
  Greater than or equal to $100,000              315,986          239,936
                                                --------         --------
                                                 585,731          486,072
                                                --------         --------
Total deposits                                  $953,143         $834,299
                                                ========         ========


15

<PAGE>



     Also contributing to the growth in liabilities during the current quarter
was an increase of 5.3% in other borrowed funds to $149.0 million at December
31, 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.

     The December 31, 2006 balance sheet also includes 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 $17.1
million reflected on the Corporation's Consolidated Statements of Financial
Position as an asset at December 31, 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 $19.8 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 connection with its preliminary
planning efforts relating to the future development of the property.

     Stockholders' equity at December 31, 2006 increased 6.8% to $121.1
million from $113.3 million at March 31, 2006.  This increase was primarily
attributable to the increase in net income to $14.1 million for the nine
months ended December 31, 2006 from $11.5 million for the nine months ended
December 31, 2005.  This change also included the effects from the
Corporation's share repurchase program.  Repurchases totaled $2.5 million for
the nine months ended December 31, 2006 compared to $4.1 million for the nine
months ended December 31, 2005.  The Corporation's capital position remains
strong, with a stockholder equity-to-assets ratio of 9.7% at December 31,
2006, compared to 10.2% at March 31, 2006.

Comparison of Operating Results for the Three Months Ended December 31, 2006
----------------------------------------------------------------------------
and December 31, 2005
---------------------

     General.  Net income increased 22.6% to $4.9 million for the three months
ended December 31, 2006 from $4.0 million for the three months ended December
31, 2005.  Diluted earnings per share for the three months ended December 31,
2006 was $0.39 on weighted average shares outstanding of 12,394,819, compared
to diluted earnings per share of $0.32 on weighted average shares of
12,498,338 for the three months ended December 31, 2005.

     Net Interest Income.  Net interest income before provision for loan
losses for the three months ended December 31, 2006 increased 15.8% to $13.4
million from $11.6 million for the comparable period in 2005.  Interest on
loans for the quarter ended December 31, 2006 increased 34.3% to $23.3
million, from $17.3 million for the comparable quarter a year ago.  This
increase was a result of a combination of factors, including the growth in
loans receivable, as the Bank experienced significant loan growth during the
quarter, increasing the loan portfolio to $1.0 billion at December 31, 2006
compared to $892.8 million at December 31, 2005; and a higher Prime lending
rate.  Interest and dividends on investments and mortgage-backed securities
for the three months ended December 31, 2006 increased 18.0% to $1.0 million,
from $866,000 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 $91.6 million at December 31, 2006 as compared to $91.1
million at December 31, 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.  This increase includes a $7,000 dividend on FHLB
of Seattle stock, which it received during the quarter ended December 31,
2006, compared to no dividend for the quarter ended December 31, 2005.  The
FHLB of Seattle has been operating under a regulatory directive since May
2005. In December 2006, the FHLB of Seattle announced that quarterly cash
dividends would resume with payment of a cash dividend in December 2006.  On
January 29, 2007, the  FHLB of Seattle declared a similar dividend ($.10 per
share), payable in February 2007   Total interest income increased 33.6% to
$24.3 million at December 31, 2006 from $18.2 million in the comparable period
one year ago.

     Total interest paid on deposits increased 63.8% to $8.7 million for the
quarter ended December 31, 2006 from $5.3 million for the quarter ended
December 31, 2005, as a result of significant growth in average deposits
outstanding to $931.4 million for the three months ended  December 31, 2006
compared to $802.2 million for the three months ended  December 31, 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 68.5%
to $2.2 million during the quarter ended December 31, 2006, compared to $1.3
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 December 31, 2006 of $176.1 million compared to
$128.0 million during the quarter ended December 31, 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 Dec 31,
Average balances:                                     2006        2005
                                                  ----------   ----------
  (In thousands)
  Loans                                           $1,050,934   $  879,836
  Investments                                         91,633       91,085
                                                  ----------   ----------
  Total interest-earning assets                    1,142,567      970,921

  Deposits                                        $  931,357   $  802,236
  Borrowings                                         176,135      128,014
                                                  ----------   ----------
  Total interest-bearing liabilities               1,107,492      930,250

  Average assets                                   1,243,702    1,069,847
  Average stockholders' equity                       119,475      109,485


                                                 For the quarter ended Dec 31,
Weighted average interest rates:                      2006        2005
                                                  ----------   ----------

  Yield on loans                                        8.86%        7.88%
  Yield on investments                                  4.46%        3.80%
                                                  ----------   ----------
  Yield on interest-earning assets                      8.51%        7.50%

  Cost of deposits                                      3.74%        2.65%
  Cost of borrowings                                    4.91%        3.80%
                                                  ----------   ----------
  Cost of interest-bearing liabilities                  3.93%        2.82%

  Net interest spread                                   4.58%        4.68%
  Net interest margin                                   4.70%        4.77%

     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 Dec 31,
                                                ----------------------------
Allowance for Loan Losses                             2006        2005
                                                    --------     --------
(In thousands)

  Allowance at  beginning of period                 $ 15,511     $ 13,161
  Provision for loan losses                              450          800
  Charge offs (net of recoveries)                          8          (36)
                                                    --------     --------
  Allowance at  end of period                       $ 15,969     $ 13,925
  Allowance for loan losses as a percentage of
   net loans receivable at the end of the period        1.53%        1.56%

  Net charge-offs as a percentage of average
   loans outstanding during the period               (0.0008%)      0.004%

     The provision for loan losses was $450,000 for the quarter ended December
31, 2006 compared to $800,000 for the quarter ended December 31, 2005.  These
provisions reflect management's ongoing analysis of changes in loan portfolio
composition by collateral categories, balances outstanding, overall credit
quality of the portfolio, peer group analysis, historical industry loss
experience, and current economic conditions.  The allowance for loan losses
was $16.0 million, or 1.53% of net loans receivable at December 31, 2006,
compared to $13.9 million, or 1.56% of net loans receivable at December 31,
2005.  The increase in the allowance to $16.0 million resulted from continued
loan portfolio growth in the higher-risk lending categories of construction
and land development, commercial real estate, and commercial business loans
during the period, which comprised $870.8 million, or 83.5% of the portfolio
at December 31, 2006, versus $732.2 million, or 82.0% at December 31, 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 December 31, 2006, there were six loans on nonaccrual status and
one loan over 90 days delinquent and still accruing.  At December 31, 2006
total non-performing loans were $1.1 million.  The Bank had no real estate
owned at December 31, 2006.  Total non-performing assets represented $1.1
million, or 0.09% of total assets at December 31, 2006 compared to $1.3
million or 0.12% of total assets at December 31, 2005.

                                                     At December 31,
                                                  --------------------
Non-Performing Assets                               2006         2005
                                                  ------        ------
(In thousands)

Accruing loans   90 days past due                 $   33        $    -
Non-accrual loans                                  1,040         1,287
                                                  ------        ------
Total non-performing loans                         1,073         1,287
Total non-performing loans/net loans                0.10%         0.14%
Real estate owned                                      -             -
                                                  ------        ------
Total non-performing assets                        1,073         1,287
                                                  ------        ------
Total non-performing assets/total assets            0.09%         0.12%

     Noninterest Income.  Noninterest income for the three months ended
December 31, 2006 decreased 4.6% to $1.4 million as compared to $1.5 million
for the same period a year ago. Service fee income decreased 9.1% to $823,000
for the quarter ended December 31, 2006 from $905,000 for the same quarter in
the prior period.  The primary reason for the decrease was the decrease in
commercial loan prepayment penalties over the prior period.  The net gain on
the sale of loans servicing released decreased 21.9% to $162,000 for the
quarter ended December 31, 2006 from $208,000 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 11.3% to $420,000 for the quarter ended December 31, 2006
from $377,000 for the three months ended December 31, 2005.  The primary
reason for the increase from the prior period was additional income related to
the purchase of approximately $5.0 million of bank owned life insurance.

     Noninterest Expense.  Noninterest expense for the three months ended
December 31, 2006 increased 8.9% to $7.1 million from $6.5 million for the
comparable quarter one year ago.  Compensation and employee benefits increased
9.9% for the quarter ended December 31, 2006 to $4.2 million from $3.8 million
for the comparable quarter one year ago.  Building occupancy for the quarter
ended December 31, 2006 increased 14.9% to $1.1 million from $957,000 for the
quarter ended December 31, 2005.  Increases in compensation and employee
benefits and building and occupancy expenses resulted from the opening a full
service regional facility in Everett, Washington in June 2006.  Other
noninterest expense increased 6.2% to $1.4 million for the quarter ended
December 31, 2006 from $1.3 million in the quarter ended December 31, 2005 as
a result of additional transfer agent and investor relations expenses, and
increased business and occupation tax as a result of the shifting loan
portfolio from non-taxable mortgage loans to taxable commercial loans.

Comparison of Operating Results for the Nine Months Ended December 31, 2006
---------------------------------------------------------------------------
and December 31, 2005
---------------------

     General.  Net income increased 22.8% to $14.1 million for the nine months
ended December 31, 2006 from $11.5 million for the nine months ended December
31, 2005.  Diluted earnings per share for the nine months ended December 31,
2006 was $1.14 on weighted average shares outstanding of 12,417,879, compared
to diluted earnings per share of $0.92 on weighted average shares of
12,561,267 for the nine months ended December 31, 2005.

     Net Interest Income.  Net interest income before provision for loan
losses for the nine months ended December 31, 2006 increased 20.3% to $39.2
million from $32.6 million for the comparable period in 2005.  Interest on
loans for the nine months ended December 31, 2006 increased 36.8% to $65.4
million, from $47.8 million for the comparable quarter a year ago.  This
increase was a result of a combination of factors, including: the growth in
loans receivable, as the Bank experienced significant loan growth during the
period, increasing the loan portfolio to $1.0 billion at December 31, 2006
compared to $892.8 million at December 31, 2005; and  an increasing Prime
lending rate.  Interest and dividends on investments and mortgage-backed
securities for the nine months ended December 31, 2006 increased 18.2% to $3.0
million, from $2.6 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 2.1% to $93.1 million during the nine months ended
December 31, 2006 as compared to $91.2 million for the nine months ended
December 31, 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.
In addition, this increase includes a $7,000 dividend on FHLB of Seattle

18

<PAGE>



stock, which it received during the nine months ended December 31, 2006,
compared to no dividend for the nine months ended December 31, 2005.  The FHLB
of Seattle has been operating under a regulatory directive since May 2005. In
December 2006, the FHLB of Seattle announced that quarterly cash dividends
would resume with payment of a cash dividend in December 2006.  On January 29,
2007, the FHLB of Seattle declared a similar dividend ($.10 per share),
payable in February 2007.   Total interest income increased 35.9% to $68.5
million at December 31, 2006 from $50.4 million in the comparable period one
year ago.

     Total interest paid on deposits increased 62.0% to $23.2 million for the
nine months ended December 31, 2006 from $14.3 million for the nine months
ended December 31, 2005, as a result of significant growth in average deposits
outstanding to $893.8 million for the nine months ended December 31, 2006
compared to $779.2 million for the nine months ended December 31, 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 74.8% to $6.0
million during the nine months ended December 31, 2006, compared to $3.4
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 nine months ended December 31, 2006 of $169.4 million compared to
$124.0 million during the nine months ended December 31, 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 nine months ended Dec 31,
Average balances:                               2006          2005
                                             ----------    ----------
(In thousands)

  Loans                                      $1,005,299    $  850,465
  Investments                                    93,096        91,197
                                             ----------    ----------
  Total interest-earning assets               1,098,395       941,662

  Deposits                                   $  893,761    $  779,151
  Borrowings                                    169,421       124,035
                                             ----------    ----------
  Total interest-bearing liabilities          1,063,182       903,186

  Average assets                              1,198,728     1,041,305
  Average stockholders' equity                  116,668       108,330

                                          For the nine months ended Dec 31,
Weighted average interest rates:                2006          2005
                                             ----------    ----------

  Yield on loans                                   8.68%         7.50%
  Yield on investments                             4.36%         3.77%
                                             ----------    ----------
  Yield on interest-earning assets                 8.31%         7.14%

  Cost of deposits                                 3.47%         2.45%
  Cost of borrowings                               4.72%         3.56%
                                             ----------    ----------
  Cost of interest-bearing liabilities             3.67%         2.61%

  Net interest spread                              4.64%         4.53%
  Net interest margin                              4.76%         4.62%

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 nine months ended Dec 31,
                                           ---------------------------------
Allowance for Loan Losses                        2006            2005
                                           ---------------  ----------------
(In thousands)

Allowance at  beginning of period                 $14,184     $11,767
Provision for loan losses                           1,850       2,275
Charge offs (net of recoveries)                       (65)       (117)
                                                  -------     -------
Allowance at  end of period                       $15,969     $13,925
Allowance for loan losses as a percentage of
 net loans receivable at the end of the period       1.53%       1.56%

Net charge-offs as a percentage of average
 loans outstanding during the period                0.006%      0.014%

     The provision for loan losses was $1.9 million for the nine months ended
December 31, 2006 compared to $2.3 million for the nine months ended December
31, 2005.  These provisions reflect management's ongoing analysis of changes
in loan portfolio composition by collateral categories, balances outstanding,
overall credit quality of the portfolio, peer group analysis, historical
industry loss experience, and current economic conditions.  The allowance for
loan losses was $16.0 million, or 1.53% of net loans receivable at December
31, 2006, compared to $13.9 million, or 1.56% of net loans receivable at
December 31, 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, and commercial business loans during
the period, which comprised $870.8 million, or 83.5% of the portfolio at
December 31, 2006, versus $732.2 million, or 82.0% at December 31, 2005.

     Noninterest Income.  Noninterest income for the nine months ended
December 31, 2006 decreased 3.1% to $4.3 million as compared to $4.5 million
for the same period a year ago.  Service fee income increased 14.8% to $2.5
million for the nine months ended December 31, 2006 from $2.2 million for the
same nine 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 $594,000 for the
nine months ended December 31, 2006 from $811,000 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
13.5% to $1.2 million for the nine months ended December 31, 2006 from $1.4
million for the nine months ended December 31, 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.  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 nine months ended
December 31, 2006 increased 11.7% to $20.5 million from $18.3 million for the
comparable nine months one year ago.  Compensation and employee benefits
increased 11.9% for the nine months ended December 31, 2006 to $12.1 million
from $10.8 million for the comparable nine months one year ago.  Building
occupancy for the nine months ended December 31, 2006 increased 18.2% to $3.1
million from $2.6 million for the nine months ended December 31, 2005.
Increases in compensation and employee benefits and building and occupancy
expenses resulted from the opening a full service retail office in Lakewood,
Washington in fiscal 2006 and a full service regional facility in Everett,
Washington in June 2006.  Other noninterest expense increased 11.3% to $4.1
million for the nine months ended December 31, 2006 from $3.7 million in the
nine months ended December 31, 2005 as a result of additional transfer agent
and investor relations expenses, and increased business and occupation tax as
a result of the shifting loan portfolio from non-taxable mortgage loans to
taxable commercial loans.

20

<PAGE>



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 nine months ended December 31,
                       ------------------------------------------------------
                                   2006                       2005
                       --------------------------  --------------------------
                                          Average                     Average
                       Average             Yield/  Average             Yield/
(In thousands)         Balance  Interest    Cost   Balance  Interest    Cost
                       -------  --------  -------  -------  --------  -------
Interest-earning
 assets:
  Loans receivable   $1,005,299 $65,428    8.68%   $850,465  $47,818   7.50%
  Investment
   securities            65,696   2,030    4.12      70,712    1,900   3.58
  Mortgage-backed
   securities            27,400   1,017    4.94      20,485      678   4.41
                     ---------- -------  ------    --------  ------- ------
    Total interest-
     earning assets   1,098,395  68,475    8.31     941,662   50,396   7.14

Interest-bearing
 liabilities:
  Deposits              893,761  23,239    3.47     779,151   14,342   2.45
  Borrowings            169,421   5,999    4.72     128,369    3,432   3.56
                     ---------- -------  ------    --------  ------- ------
    Total interest-
     bearing
     liabilities      1,063,182  29,238    3.67     907,520   17,774   2.61
                                -------                      -------

Net interest income             $39,237                      $32,622
                                =======                      =======

Interest rate spread                       4.64%                       4.53%
Net interest margin                        4.76%                       4.62%

Ratio of average
 interest-earning
 assets to average
 interest-bearing
 liabilities                             103.31%                     103.77%

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).

                                            Nine months ended December 31,
                                           --------------------------------
                                                    2006 vs. 2005
                                           --------------------------------
                                              Increase (Decrease) Due to
                                           --------------------------------
                                                            Rate/
(In thousands)                             Volume   Rate    Volume    Total
                                           ------   ----    ------    -----

Interest income:
  Interest and fees on loans              $8,705  $7,533   $1,372   $17,610
  Investment securities and other
   interest-bearing securitites               54     407        8       469
                                          ------  ------   ------   -------

Total interest-earning assets             $8,759  $7,940   $1,380   $18,079
                                          ======  ======   ======   =======
Interest expense:
  Deposit accounts                        $2,110  $5,917   $  870   $ 8,897
  Borrowings                               1,098   1,113      356     2,567
                                          ------  ------   ------   -------

Total interest-bearing liabilities        $3,208  $7,030   $1,226   $11,464
                                          ======  ======   ======   =======


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 December 31, 2006, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with an amortized cost of $64.3 million.

     As of December 31, 2006 the total amortized cost of investments and
mortgage-backed securities was $77.4 million compared to a market value of
$83.1 million with an unrealized gain of $5.7 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 impair 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 December 31, 2006 was $121.1 million, or 9.7%
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 December 31, 2006 was 11.9%, 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 December 31, 2006,
the Corporation repurchased 8,100 shares at an average price of $23.25 and for
the nine-month period ended December 31, 2006, the Corporation repurchased
124,080 shares at an average price of $19.85.  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 December 31, 2006, the
Corporation had no significant off-balance sheet derivative financial
instruments, nor did it have a trading portfolio of investments.  At December
31, 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 December 31, 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 December 31, 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 Corp. 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 February 1, 2007, there were 12,261,629
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 December 31, 2006,
the Corporation repurchased 8,100 shares at an average price of $23.25 and for
the nine-month period ended December 31, 2006, the Corporation repurchased
124,080 shares at an average price of $19.85.  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 December 31, 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
------------------    ----------     -----------   ----------   --------------

October 1, 2006 -
  October 31, 2006           -               -       115,980       509,020
November 1,  2006 -
  November 30, 2006      8,100          23.251       124,080       500,920
December 1, 2006 -
 December 31, 2006           -               -       124,080       500,920
Total                    8,100          23.251       124,080       500,920

(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:  February 8, 2007
                                 --------------------

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:  February 8, 2007       /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: February 8, 2007               /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:  February 8, 2007

30

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