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, 2005
                                              -----------------

                                      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 a 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 filer" in Rule 12b-2 of the Exchange
Act

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 January 31, 2006, 9,896,177 common shares, $1.00 par value, were
outstanding.

<PAGE>



                            HORIZON FINANCIAL CORP.

INDEX                                                                PAGE
-----                                                                ----

PART 1          FINANCIAL INFORMATION

Item  1         Condensed 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  7-8

Item  2         Management's Discussion and Analysis of Financial
                     Condition and Results of Operations             9-17

Item  3         Quantitative and Qualitative Disclosures About
                     Market Risk                                      18

Item  4         Controls and Procedures                               18


PART II         OTHER INFORMATION

Item  1         Legal Proceedings                                     19

Item  2         Unregistered Sales of Equity Securities and Use
                     of Proceeds                                      19

Item  3         Defaults Upon Senior Securities                       19

Item  4         Submission of Matters to a Vote of Security Holders   20

Item  5         Other Information                                     20

Item  6         Exhibits                                              20

                  SIGNATURES                                          21

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,
                                                  2005               2005

                                             --------------      ------------
Cash and cash equivalents                    $   25,243,816     $  23,250,411
Interest-bearing deposits                         1,614,188         3,907,349
Investment securities
  Available-for-sale                             63,015,751        71,824,994
  Held-to-maturity                                  369,709           369,596
Mortgage-backed securities
  Available-for-sale                             24,943,553        18,510,439
  Held-to-maturity                                  566,060           885,137
Federal Home Loan Bank Stock                      7,247,400         7,217,900
Loans receivable, net of allowance of loan
 losses for $13,925,024 at December 31 and
 $11,767,029 at March 31                        892,808,488       804,980,578
Loans held for sale, at fair value                1,902,000         4,068,859
Investment in real estate in a joint venture     16,881,926        17,204,265
Accrued interest and dividends receivable         5,254,061         4,498,756
Bank premises and equipment, net                 24,459,612        22,781,657
Deferred income tax receivables                   2,340,895         2,299,225
Income tax receivable                             1,002,038           330,862
Other assets                                     16,093,787        15,440,447
                                             --------------      ------------
TOTAL ASSETS                                 $1,083,743,284      $997,570,475
                                             ==============      ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY


Deposits                                     $  814,747,897      $746,849,411
Accounts payable and other liabilities            6,536,651         5,570,071
Other borrowed funds                            131,900,566       119,066,193
Borrowing related to investment in real
 estate in a joint venture                       17,868,784        16,720,745
Advances by borrowers for taxes and insurance       236,349           518,774
Deferred compensation                             1,876,744         1,821,094
                                             --------------      ------------
     Total liabilities                          973,166,991       890,546,288
                                             --------------      ------------
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; 9,894,380 and
   10,037,903 shares issued and outstanding,
   respectively                                   9,894,380        10,037,903
  Additional paid-in capital                     54,009,235        54,737,070
  Retained earnings                              43,443,621        38,939,268
  Unearned ESOP shares                              (72,101)          (72,101)
  Accumulated other comprehensive income,
   net of tax                                     3,301,158         3,382,047
                                             --------------      ------------
     Total stockholders' equity                 110,576,293       107,024,187
                                             --------------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $1,083,743,284      $997,570,475
                                             ==============      ============

             (See Notes to Consolidated Financial Statements)


2

<PAGE>



                           HORIZON FINANCIAL CORP.
                Consolidated Statements of Income (unaudited)

                                                       Three months ended
                                                           December 31,
                                                       2005          2004
                                                   -----------    -----------
INTEREST INCOME
  Interest on loans                                $17,327,714    $12,271,820
  Interest on investments and mortgage-backed
   securities                                          865,845      1,022,340
                                                   -----------    -----------
     Total interest income                          18,193,559     13,294,160
                                                   -----------    -----------
INTEREST EXPENSE
  Interest on deposits                               5,320,755      3,314,915
  Interest on other borrowings                       1,282,824        770,825
                                                   -----------    -----------
     Total interest expense                          6,603,579      4,085,740
                                                   -----------    -----------
     Net interest income                            11,589,980      9,208,420

PROVISION FOR LOAN LOSSES                              800,000        350,000
                                                   -----------    -----------
     Net interest income after provision for
      loan losses                                   10,789,980      8,858,420
                                                   -----------    -----------
NONINTEREST INCOME
  Service fees                                       1,164,154        759,681
  Other                                                376,875        584,020
  Net gain on sales of loans - servicing released      208,043        221,385
  Net gain (loss) on sales of loans -
   servicing retained                                   (2,403)        13,203
  Net gain on sale of investment securities                  -          1,312
                                                   -----------    -----------
     Total noninterest income                        1,746,669      1,579,601
                                                   -----------    -----------
NONINTEREST EXPENSE
  Compensation and employee benefits                 3,786,219      3,290,811
  Building occupancy                                   956,835        778,933
  Other expenses                                     1,573,372      1,236,158
  Data processing                                      231,198        373,809
  Advertising                                          189,095        134,993
                                                   -----------    -----------
     Total noninterest expense                       6,736,719      5,814,704
                                                   -----------    -----------

NET INCOME BEFORE PROVISION FOR INCOME TAX           5,799,930      4,623,317

PROVISION FOR INCOME TAX                             1,817,081      1,399,403
                                                   -----------    -----------

NET INCOME                                         $ 3,982,849    $ 3,223,914
                                                   ===========    ===========

BASIC EARNINGS PER SHARE                              $  0.40       $  0.32
                                                      =======       =======

DILUTED EARNINGS PER SHARE                            $  0.40       $  0.31
                                                      =======       =======

               (See Notes to Consolidated Financial Statements)

3

<PAGE>



                            HORIZON FINANCIAL CORP.
                 Consolidated Statements of Income (unaudited)

                                                       Nine months ended
                                                          December 31,
                                                      2005            2004
                                                  -----------     -----------
INTEREST INCOME
  Interest on loans                               $47,817,781     $35,170,503
  Investment and mortgage-backed securities         2,577,713       3,191,997
                                                  -----------     -----------
     Total interest income                         50,395,494      38,362,500
                                                  -----------     -----------

INTEREST EXPENSE
  Interest on deposits                             14,341,791       9,703,156
  Interest on other borrowings                      3,431,821       1,994,629
                                                  -----------     -----------
     Total interest expense                        17,773,612      11,697,785
                                                  -----------     -----------
     Net interest income                           32,621,882      26,664,715

PROVISION FOR LOAN LOSSES                           2,275,000         975,000
                                                  -----------     -----------
     Net interest income after provision for
      loan losses                                  30,346,882      25,689,715
                                                  -----------     -----------

NONINTEREST INCOME
  Service fees                                      2,918,929       2,420,911
  Other                                             1,411,933       1,401,931
  Net gain on sales of loans - servicing released     811,172         761,096
  Net gain on sales of loans - servicing retained      49,615          68,627
  Net gain on sale of investment securities            42,184         471,063
                                                  -----------     -----------
     Total noninterest income                       5,233,833       5,123,628
                                                  -----------     -----------

NONINTEREST EXPENSE
  Compensation and employee benefits               10,842,935       9,470,826
  Building occupancy                                2,594,933       2,122,940
  Other expenses                                    4,445,552       3,834,986
  Data processing                                     666,645         801,642
  Advertising                                         546,179         511,439
                                                  -----------     -----------
     Total noninterest expense                     19,096,244      16,741,833
                                                  -----------     -----------

NET INCOME BEFORE PROVISION FOR INCOME TAX         16,484,471      14,071,510

PROVISION FOR INCOME TAX                            4,993,823       4,266,364
                                                  -----------     -----------

NET INCOME                                        $11,490,648     $ 9,805,146
                                                  ===========     ===========

BASIC EARNINGS PER SHARE                             $  1.15         $  0.96
                                                     =======         =======

DILUTED EARNINGS PER SHARE                           $  1.14         $  0.94
                                                     =======         =======

                 (See Notes to Consolidated Financial Statements)

4

<PAGE>


<TABLE>
                                        HORIZON FINANCIAL CORP.
                            Consolidated Statements of Stockholders' Equity
                              Nine Months Ended December 31, 2005 and 2004
                                              (unaudited)

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

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

BALANCE, March 31, 2004      10,405,331  $10,405,331   $56,893,824  $36,925,836   $ (144,205)    $5,226,207
Comprehensive income
 Net income                           -            -             -    9,805,146            -              -
 Other comprehensive income
  Change in unrealized losses
   on available-for-sale
   securities, net taxes
   (benefit) of $(416,707)            -            -             -            -            -       (808,901)
  Total other comprehensive
   income                             -            -             -            -            -              -
Comprehensive income                  -            -             -            -            -              -
Cash dividends on common
 stock at $.395/sh                    -            -             -   (4,027,603)           -              -
Stock options exercised          59,919       59,919       385,382            -            -              -
Treasury stock purchased              -            -             -            -            -              -
Retirement of treasury stock   (344,102)    (344,102)   (1,961,725)  (4,194,578)           -              -
                             ----------  -----------   -----------  -----------   ----------     ----------

BALANCE, December 31, 2004   10,121,148  $10,121,148   $55,317,481  $38,508,801   $ (144,205)    $4,417,306
                             ==========  ===========   ===========  ===========   ==========     ==========

BALANCE, March 31, 2005      10,037,903  $10,037,903   $54,737,070  $38,939,268   $  (72,101)    $3,382,047
Comprehensive income
 Net income                           -            -             -   11,490,648            -              -
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net taxes of
   $(41,670)                          -            -             -            -            -        (80,889)
   Total other comprehensive
    income                            -            -             -            -            -              -
Comprehensive income                  -            -             -            -            -              -
Cash dividends on common
 stock at $.425/sh                    -            -             -   (4,216,702)           -              -
Tax benefit associated with
 stock options                        -            -       136,342            -            -              -
Stock options exercised          59,029       59,029       290,572            -            -              -
Treasury stock purchased              -            -             -            -            -              -
Retirement of treasury stock   (202,552)    (202,552)   (1,154,749)  (2,769,593)           -              -
                             ----------  -----------   -----------  -----------   ----------     ----------

BALANCE, December 31, 2005    9,894,380  $ 9,894,380   $54,009,235  $43,443,621   $  (72,101)    $3,301,158
                             ==========  ===========   ===========  ===========   ==========     ==========

</TABLE>

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

                            <c>               <c>                <c>

BALANCE, March 31, 2004       $         -        $109,306,993
Comprehensive income
 Net income                             -           9,805,146        $ 9,805,146
 Other comprehensive income
  Change in unrealized losses
   on available-for-sale
   securities, net taxes
   (benefit) of $(416,707)              -            (808,901)          (808,901)
                                                                     -----------
  Total other comprehensive
   income                                                   -           (808,901)
                                                                     -----------
Comprehensive income                    -                   -        $ 8,996,245
                                                                     ===========
Cash dividends on common
 stock at $.395/sh                      -          (4,027,603)
Stock options exercised                 -             445,301
Treasury stock purchased       (6,500,405)         (6,500,405)
Retirement of treasury stock    6,500,405                   -
                              -----------        ------------

BALANCE, December 31, 2004    $         -        $108,220,531
                              ===========        ============

BALANCE, March 31, 2005       $         -        $107,024,187
Comprehensive income
 Net income                             -          11,490,648        $11,490,648
 Other comprehensive income
  Change in unrealized gains
   on available-for-sale
   securities, net taxes of
   $(41,670)                            -             (80,889)           (80,889)
                                                                     -----------
   Total other comprehensive
    income                                                  -            (80,889)
                                                                     -----------
Comprehensive income                    -                   -        $11,409,759
                                                                     ===========
Cash dividends on common
 stock at $.425/sh                      -          (4,216,702)
Tax benefit associated with
 stock options                          -             136,342
Stock options exercised                 -             349,601
Treasury stock purchased       (4,126,894)         (4,126,894)
Retirement of treasury stock    4,126,894                   -
                              -----------        ------------

BALANCE, December 31, 2005    $         -        $110,576,293
                              ===========        ============

                                 (See Notes to Consolidated Financial Statements)

</TABLE>

5

<PAGE>




                             HORIZON FINANCIAL CORP.
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                                                         Nine Months Ended
                                                           December 31,
                                                       2005          2004
                                                  ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                     $  11,490,648    $ 9,805,146
Adjustments to reconcile net income to net
cash provided by operating activities
  Depreciation and amortization                        776,031        431,117
  Stock dividends - Federal Home Loan Bank stock       (29,500)      (203,000)
  Provision for loan losses                          2,275,000        975,000
Changes in assets and liabilities
  Accrued interest and dividends receivable           (755,305)      (358,474)
  Interest payable                                   1,175,860        191,961
  Net change in loans held for sale                  2,166,859     (1,254,750)
  Federal income tax (receivable) payable             (671,176)    (1,756,636)
  Tax benefit associated with stock options            136,342              -
  Other assets                                        (653,340)      (874,724)
  Other liabilities                                   (515,623)    (1,019,719)
                                                 -------------   ------------
     Net cash flows from operating activities       15,395,796      5,935,921
                                                 -------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Net change in interest-bearing deposits           (2,293,161)    19,581,926
  Purchases of investment securities -
   available-for-sale                              (10,215,000)   (10,915,000)
  Proceeds from sales and maturities of
   investment securities - available-for-sale       19,133,220     19,230,816
  Purchases of mortgage-backed securities -
   available-for-sale                              (12,123,914)             -
  Proceeds from maturities of mortgage-backed
   securities - available-for-sale                   5,459,265      7,957,727
  Proceeds from maturities of mortgage-backed
   securities - held-to-maturity                       318,964        519,294
  Net change in loans                              (89,670,650)   (84,645,745)
  Purchases of bank premises and equipment          (2,886,246)    (5,656,982)
  Net change in investment in real estate in a
   joint venture                                       322,339    (17,163,327)
  Net change in other real estate owned                      -         63,432
                                                 -------------   ------------
     Net cash flows from investing activities      (87,368,862)   (71,027,859)
                                                 -------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                            67,898,486     23,575,688
  Advances from other borrowed funds               116,834,373     78,949,392
  Repayments of other borrowed funds              (104,000,000)   (42,000,000)
  Net change in borrowing related to investment
   in real estate in a joint venture                 1,148,039     16,462,238
  Common stock issued, net                             349,601        445,301
  Cash dividends paid                               (4,137,134)    (3,961,915)
  Treasury stock purchased                          (4,126,894)    (6,500,405)
                                                 -------------   ------------
     Net cash flows from financing activities       73,966,471     66,970,299
                                                 -------------   ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS              1,993,405      1,878,361

CASH AND CASH EQUIVALENTS, beginning of period      23,250,411     18,431,964
                                                 -------------   ------------

CASH AND CASH EQUIVALENTS, end of period         $  25,243,816   $ 20,310,325
                                                 =============   ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for interest       $  16,597,752   $ 11,505,824
                                                 =============   ============
  Cash paid during the period for income tax     $   5,665,000   $  6,023,000
                                                 =============   ============

                (See Notes to Consolidated Financial Statements)

6

<PAGE>



                           HORIZON FINANCIAL CORP.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2005
                                (unaudited)

NOTE 1 -

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

     The condensed consolidated financial statements as of and for the three
and nine months ended December 31, 2005 and 2004, include the accounts of
Horizon Financial Corp. (the Corporation), Horizon Bank (the Bank), and other
subsidiaries of the Bank.  Significant intercompany balances and transactions
have been eliminated in consolidation. The Corporation has engaged in no
significant activity other than effecting share repurchases of the
Corporation's common stock and 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 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, 2005 are not necessarily indicative of
the operating results for the full year ending March 31, 2006.  For further
information, refer to the consolidated financial statements and footnotes
thereto in the Corporation's Annual Report on Form 10-K for the year ended
March 31, 2005.

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

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

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 our
liability.  The real estate joint venture has a carrying amount of
approximately $16.9 million, with a related borrowing of approximately $17.9
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 $95,000 for the three months
ended December 31, 2005 and $243,000 for the nine months ended December 31,
2005.

7

<PAGE>



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

     Basic earnings per share (EPS) for the three months ended December 31,
2005 and 2004 are calculated on the basis of 9,911,027 and 10,142,905 weighted
average shares outstanding, respectively. Diluted EPS for the three months
ended December 31, 2005 and 2004 are calculated on the basis of 9,998,670 and
10,288,948 weighted average shares outstanding, respectively.  Basic earnings
per share for the nine months ended December 31, 2005 and 2004 are calculated
on the basis of 9,950,757 and 10,251,119 weighted average shares outstanding,
respectively. Diluted earnings per share for the nine months ended December
31, 2005 and 2004 are calculated on the basis of 10,049,013 and 10,406,122
weighted average shares outstanding, respectively.  Diluted EPS figures are
computed by determining the number of additional shares that are deemed
outstanding due to stock options under the treasury stock method.

Stock Options
-------------

     In December 2004, the FASB issued Statement of Financial Accounting
Standard (Statement) No. 123(R), Share-Based Payment, which is a revision of
Statement No. 123, Accounting for Stock-Based Compensation.  Statement 123(R)
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and amends Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123.  However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values.  Pro
forma disclosure is no longer an alternative.  The SEC's new rule allows
public companies to implement Statement 123(R) at the beginning of their next
fiscal year, instead of the next reporting period, after June 15 or December
15, 2005, as applicable.  The SEC's new rule does not change the accounting
required by Statement 123(R); only the compliance deadlines have been altered.
With the recent extension, the Corporation expects to adopt Statement 123(R)
on April 1, 2006.

     As permitted by Statement 123, the Corporation currently recognizes the
financial effects of stock options under the intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method may have a
significant impact on our results of operations, although the amount of this
impact cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future.  However, had the Corporation
adopted Statement 123(R) in prior periods, the impact of that standard would
have approximated the impact of Statement 123 as described in the disclosure
of pro forma net income and earnings per share below.  Statement 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature.  This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption.

     Under APB 25, options issued in this manner do not result in the
recognition of employee compensation in the Corporation's financial
statements. Disclosures required by Statement No. 123, Accounting for
Stock-Based Compensation, as amended are as follows:

Pro forma disclosures:

                        For the Three Months Ended   For the Nine Months Ended
                                December 31,                December 31,
                            2005           2004         2005           2004
                         ----------    -----------   -----------   -----------
Net income as reported   $3,982,849     $3,223,914   $11,490,648   $9,805,146
Additional compensation
 expense for fair value
 of stock options           (14,965)        (3,063)      (33,924)     (16,145)
                         ----------     ----------   -----------   ----------
Pro forma net income     $3,967,884     $3,220,851   $11,456,724   $9,789,001
                         ==========     ==========   ===========   ==========

Earnings per share

Basic

  As reported              $ 0.40         $ 0.32       $ 1.15       $ 0.96
                           ======         ======       ======       ======

  Pro forma                $ 0.40         $ 0.32       $ 1.15       $ 0.95
                           ======         ======       ======       ======

Diluted

  As reported              $ 0.40         $ 0.31       $ 1.14       $ 0.94
                           ======         ======       ======       ======

  Pro forma                $ 0.40         $ 0.31       $ 1.14       $ 0.94
                           ======         ======       ======       ======

8

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

General
-------

     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.  The acquisition of Bellingham Bancorporation in June 1999
increased the Corporation's and the Bank's presence in Whatcom County.   In
fiscal 2002, the Bank acquired a bank site in Lynnwood, which was remodeled
and opened for business in March 2003.  The Bank opened commercial
banking/loan centers in Bellingham and Everett, Washington, and expanded its
operations in Burlington, Washington during the first quarter of fiscal 2004.
In November 2004, the Bank opened a full service office in Marysville,
Washington.  In April 2005, the Bank opened a full service office in Lakewood,
Washington, located in Pierce County, just south of Tacoma.  Future plans for
the Bank include the opening of a full service regional facility in the first
quarter of fiscal 2007, which will replace the Bank's existing office and
commercial banking center in south Everett.

     The Corporation's results of operations depend primarily on revenue
generated as a result of its net interest income and noninterest income.  Net
interest income is the difference between the interest income the Corporation
earns on its interest-earning assets (consisting primarily of loans,
investments 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.

9

<PAGE>



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

     The Corporation does not presently engage in any activities outside of
holding the common stock of the Bank and effecting repurchases of the
Corporation's common stock.

     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, 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, and to a lesser extent with FHLB advances and
other wholesale borrowings.

     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.

     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 and net gains
and losses on sales of interest-earning assets.  Other noninterest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs.  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.

     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.

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

     Total consolidated assets for the Corporation as of December 31, 2005,
were $1.1 billion, an 8.6% increase from the March 31, 2005 level of $997.6
million.  This increase in assets was primarily a result of the growth in
loans receivable, which increased 10.9% to $892.8 million at December 31, 2005
from $805.0 million at March 31, 2005.  This growth was primarily attributable
to the growth in commercial loans during this period, including an $80.9
million or 49.7% increase in construction and land development loans since
March 31, 2005.  The Bank continued its focus on expanding its relationships
with established residential real estate developers and 1-4 family residential
builders, which resulted in the continued growth in this component of loans
receivable during the period.  First mortgage loans decreased during the
period, as the Bank continued its practice of selling most of its
single-family fixed rate loan production into the secondary market.  The Bank
sold $22.2 million of real estate loans during the quarter ended December 31,
2005, compared to $21.5 million during the quarter ended December 31, 2004.

10

<PAGE>



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

                                              December 31,       March 31,
                                                 2005             2005
                                              -----------        --------
                                                    (In thousands)
First mortgage loans
  1-4 Family                                    $149,766        $167,454
  1-4 Family construction                         21,408          16,464
  Less participations sold                       (57,761)        (65,125)
                                                --------        --------
     Net first mortgage loans                    113,413         118,793
Construction and land development                243,661         162,726
Residential commercial real estate                67,890          73,397
Non-residential commercial real estate           313,235         312,722
Commercial loans                                 119,522         109,387
Home equity secured                               42,950          33,762
Other consumer loans                               6,063           5,961
                                                --------        --------
     Subtotal                                    793,321         697,955
                                                --------        --------
  Total Loans receivable                         906,734         816,748
                                                --------        --------
Less:
  Allowance for loan losses                      (13,925)        (11,767)
                                                --------        --------
  Net Loans receivable                          $892,809        $804,981
                                                ========        ========

Net residential loans                           $ 12,424  13%   $117,809   15%
Net commercial loans                             117,243  13%    107,404   13%
Net commercial real estate loans                 614,945  69%    540,698   67%
Net consumer loans                                48,197   5%     39,070    5%
                                                -------- ---    --------  ---
                                                $892,809 100%   $804,981  100%
                                                ======== ===    ========  ===

The tables below display the characteristics of the available for sale (AFS)
and held to maturity (HTM) portfolios as of December 31, 2005:

                                                                Estimated
                                        Amortized       Net       Fair
                                          Cost      Gain/(Loss)   Value
                                       ----------- -----------  ----------
                                                  (In thousands)
AFS Securities
  State and political subdivisions
   and U.S. government agency
   securities                            $49,038      $ (958)     $48,080
  Marketable equity securities             1,824       6,211        8,035
  Mutual funds                             5,000        (121)       4,879
  Corporate debt securities                2,016           5        2,021
  Mortage-backed securities and
    Collateralized mortgage
     obligations (CMOs)                   25,018         (74)      24,944
                                         -------      ------      -------
    Total available-for-sale securities   82,896       5,063       87,959
                                         -------      ------      -------

HTM Securities
  State and political subdivisions and
   U.S. government agency securities         370           7          377
  Mortgage-backed securities and
    CMOs                                     566          22          588
                                         -------      ------      -------
    Total held-to-maturity securities        936          29          965
                                         -------      ------      -------

    Total securities                     $83,832      $5,092      $88,924
                                         =======      ======      =======

11

<PAGE>



                     Maturity Schedule of Securities at December 31, 2005
                   ---------------------------------------------------------
                         Available-For-Sale         Held-To-Maturity
                   -------------------------    ----------------------------
                     Amortized    Estimated      Amortized     Estimated
                        Cost      Fair Value       Cost       Fair Value
                   ------------  ------------   ------------ ---------------
                                        (In thousands)
Maturities:
  One year or less    $ 8,719      $ 8,710            $  -        $  -
  Over one  to five
   years               38,736       37,939             885         903
  Over five to ten
   years                6,031        5,924               8           8
  Over ten years       22,586       22,472              43          54
                      -------      -------            ----        ----
                       76,072       75,045             936         965
                      -------      -------            ----        ----

Mutual funds and
  marketable equity
  securities (liquid)   6,824       12,914               -           -
                      -------      -------            ----        ----
Total investment
  securities          $82,896      $87,959            $936        $965
                      =======      =======            ====        ====

     Total liabilities also increased 9.3% to $973.2 million at December 31,
2005, from $890.5 million at March 31, 2005.  This increase in liabilities was
the result, in large part, of growth in deposits, which increased 9.1% to
$814.7 million at December 31, 2005 from $746.8 million at March 31, 2005 as
the result of gains in money market and checking accounts as shown below as
well as approximately $34.7 million in jumbo deposit balance growth, as the
Bank attracted these dollars to fund a portion of its loan growth during the
period  The following is an analysis of the deposit portfolio by major type of
deposit at December 31, 2005 and March 31, 2005:

                                 December 31, 2005      March 31, 2005
                                 -----------------      --------------
                                             (In thousands)

Demand deposits
  Savings                            $ 32,958               $ 40,863
  Checking                             79,835                 83,268
  Checking (noninterest-bearing)       85,949                 63,503
  Money Market                        151,128                134,761
                                     --------               --------
                                      349,870                322,395
                                     --------               --------

Time certificates of deposit
  Less than $100,000                  245,870                240,178
  Greater than or equal to $100,000   219,008                184,276
                                     --------               --------
                                      464,878                424,454
                                     --------               --------
Total deposits                       $814,748               $746,849
                                     ========               ========

     Also contributing to the growth in liabilities was a $12.8 million
increase in other borrowed funds to $131.9 million at December 31, 2005 from
$119.1 million at March 31, 2005.  During the quarter the Bank borrowed
additional funds from the FHLB to help manage interest rate risk and support
asset growth.

     Also included in the balance sheet is an investment in real estate for a
joint venture and the corresponding borrowing.  During the year ended March
31, 2005, Westward Financial as a 50% partner in the Greenbriar Northwest LLC
(GBNW) 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 $16.9 million
shown on the Corporation's Consolidated Statements of Financial Position as an
asset at December 31, 2005 represents the current level of the investment in
real estate joint ventures, including the Fairhaven Highlands joint venture.
At March 31, 2005, the $17.2 million total investment in joint ventures
included a small remaining portion of a residential development joint venture
that has since been completed and closed.   The $17.9 million shown in the
liability section of the Consolidated Statements of Financial Position
represents the corresponding wholesale borrowing used to fund the initial
investment and subsequent ongoing expenses related to the Fairhaven Highlands
joint venture.  At this time, GBNW is in the process of meeting with the
appropriate public and private entities, in its preliminary planning efforts
relating to the future development of the property.

     Stockholders' equity at December 31, 2005 increased slightly to $110.6
million from $107.0 million at March 31, 2005.  The Corporation remains strong
in terms of its capital position, with a stockholder equity-to-assets ratio of
10.2% at December 31, 2005, compared to 10.7% at March 31, 2005.

12

<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, 2005, the Bank had liquid
assets (cash and marketable securities with maturities of one year or less)
with a book value of $51.9 million.

     As of December 31, 2005 the total book value of investments and
mortgage-backed securities was $83.8 million compared to a market value of
$88.9 million with an unrealized gain of $5.1 million.  As of March 31, 2005,
the total book value of investments and mortgage-backed securities was $86.4
million, compared to a market value of $91.6 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 banking activities,
which consist primarily of mortgage loan repayments, deposit increases, loan
sales, borrowings and cash received from the maturity or sale of investment
and mortgage-backed 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, 2005 was $110.6 million, or 10.2%
of assets, compared to $107.0, or 10.7% of assets at March 31, 2005.  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, 2005 was 12.7%, compared to 13.7% as of March
31, 2005.  These figures are well above the well-capitalized minimum of 10%
set by the FDIC.

     The Corporation has had various stock buy-back programs since August
1996.  In March 2005, the Board of Directors approved a new stock repurchase
plan that runs through the 2006 fiscal year, allowing the Corporation to
repurchase up to 10% of total shares outstanding, or approximately 1.0 million
shares.  This marked the Corporation's seventh stock repurchase plan.  During
the quarter ended December 31, 2005, the Corporation repurchased 29,451 shares
at an average price of $21.97 and for the nine-month period ended December 31,
2005, the Corporation repurchased 202,552 shares at an average price of
$20.32.

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

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

     Net interest income before provision for loan losses for the three months
ended December 31, 2005 increased 25.9% to $11.6 million from $9.2 million in
the same time period of the previous year.  Interest on loans for the quarter
ended December 31, 2005 increased 41.2% to $17.3 million, from $12.3 million
for the comparable quarter a year ago. Contributing to the increase in the
current year was a higher level of average loans outstanding of $880 million
for the period ended December 31, 2005 compared to $735 million in the prior
period one year ago.  Also contributing to this increase in interest income
were the recent increases to the Prime lending rate which took the Prime
lending rate to 7.25% at December 31, 2005 compared to 6.75% at September 30
2005 and 5.25% at December 31, 2004. Another contributing factor to the
increase interest income on loans relates to the Bank's deferred fee
recognition, which increased to $1.0 million in the quarter ended December 31,
2005 compared to $631 thousand in the comparable period one year ago.  This
increase is primarily attributable to the Bank's growth in its real estate
construction and development lending activities, which results in increased
deferred loan fee recognition when compared to longer term loans which turn
over less frequently. Interest and dividends on investments and
mortgage-backed securities for the three months ended December 31, 2005
decreased 15.3% to $866,000, from $1.0 million for the comparable quarter a
year ago.  This decrease was a result of a lower level of investments and
mortgage backed securities outstanding during the respective periods, as
average total investments decreased 15.6% to $91.1 million for the quarter
ended December 31, 2005 as compared to $107.9 million for the quarter ended
December 31, 2004 as

13

<PAGE>



funds were shifted from the investment and mortgage-backed securities
portfolio to fund loans receivable.  Total interest income increased 36.9% to
$18.2 million at December 31, 2005 from $13.3 million in the comparable period
one year ago.  At December 31, 2005, the Bank held $7.2 million in FHLB of
Seattle stock and did not receive any dividends on that investment during the
quarter ended December 31, 2005 as compared to $39,000 in the comparable
quarter one year ago.  On May 18, 2005, the FHLB of Seattle announced a
three-year dividend suspension; therefore, the Bank's investment income will
be reduced accordingly during that period.

     Total interest paid on deposits increased 60.5% to $5.3 million for the
quarter ended December 31, 2005 from $3.3 million for the quarter ended
December 31, 2004 as a result of an increased level of deposits outstanding
along with an increase in interest rates in the current period.  Interest on
borrowings increased 66.4% to $1.3 million during the quarter ended December
31, 2005, compared to $771,000 for the comparable period one year ago.  The
increased expense in the current year was a result of a higher level of
borrowings outstanding and increases in short term market interest rates,
which increased the interest expense for the Bank's short term borrowings..
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:

Quarterly average balances for
 the quarter ended:                 December 31, 2005     December 31, 2004
                                    -----------------     -----------------

                                                  (In thousands)

  Loans                                 $  879,836             $734,521
  Investments                               91,085              107,880
                                        ----------             --------
  Total interest-earning assets         $  970,921             $842,401
                                        ----------             --------

  Deposits                              $  802,236             $694,178
  Borrowings                               128,014               96,747
                                        ----------             --------
  Total interest-bearing liabilities    $  930,250             $790,925
                                        ----------             --------

  Average assets                         1,069,847              910,554
  Average stockholders' equity             109,485              107,699

Quarterly weighted average interest
 rates for the Quarter ended:       December 31, 2005     December 31, 2004
                                    -----------------     -----------------

  Yield on loans                            7.88%                6.68%
  Yield on investments                      3.77%                3.76%
                                            ----                 ----
  Yield on interest-earning assets          7.50%                6.31%

  Cost of deposits                          2.63%                1.89%
  Cost of borrowings                        3.92%                3.16%
                                            ----                 ----
  Cost of interest-bearing liabilities      2.82%                2.05%

  Net interest spread                       4.68%                4.26%
  Net interest margin                       4.77%                4.37%

     Total interest income increased 31.4% to $50.4 million for the nine
months ended December 31, 2005 from $38.4 million in the comparable period one
year ago. Net interest income before provision for loan losses for the nine
months ended December 31, 2005 increased 22.3% to $32.6 million from $26.7
million in the same time period of the previous year. Total interest income
for the nine months ended December 31, 2005 increased 31.4% to $50.4 million
from $38.4 million for the comparable period one year ago.  Interest on loans
for the nine months ended December 31, 2005 increased 36.0% to $47.8 million,
from $35.2 million for the comparable period a year ago. Contributing to the
increase in the current year was a higher level of average loans outstanding
of $850.5 million for the nine month period ended December 31, 2005 compared
to $703.5 million in the comparable period one year ago.  Also contributing in
this regard were the increases in the Prime lending rate during the year,
which resulted in a Prime rate of 7.25% at December 31, 2005 compared to 5.25%
at December 31, 2004. Also contributing to the increase interest income on
loans relates to the Bank's deferred loan fee recognition, which increased to
$2.50 million in the nine months ended December 31, 2005 compared to $2.0
million in the comparable period one year ago.  As stated above in the
discussion on the quarterly results, this increase is primarily attributable
to the Bank's continued growth in its real estate construction and development
lending activities, which results in increased deferred loan fee

14

<PAGE>



recognition when compared to longer term loans which turn over less frequently
Interest and dividends on investments and mortgage-backed securities for the
nine months ended December 31, 2005 decreased 19.2% to $2.6 million, from $3.2
million for the comparable period a year ago.  This decrease was a result of a
lower level of investments and mortgage backed securities outstanding during
the respective periods, as average total investments decreased 21.3% to $91.1
million at December 31, 2005 as compared to $115.8 million for the nine months
ended December 31, 2004 as funds were shifted from the investment and
mortgage-backed securities portfolio to fund loans receivable.  At December
31, 2005, the Bank held $7.2 million in FHLB of Seattle stock and received
only $29,500 in dividends on that investment during the nine months ended
December 31, 2005 as compared to $203,000 in the comparable period one year
ago.  On May 18, 2005, the FHLB of Seattle announced a three-year dividend
suspension; therefore, the Bank's investment income will be reduced
accordingly during that period.

Total interest expense for the nine-month period ended December 31, 2005
increased 51.9% to $17.8 million from $11.7 million for the nine months ended
December 31, 2004. Total interest paid on deposits increased 47.8% to $14.3
million for the nine months ended December 31, 2005 from $9.7 million for the
comparable period a year ago as a result of an increased level of deposits
outstanding to $779.2 million in the nine months ended December 31, 2005
compared to $684.2 million in the comparable nine month period one year ago.
Also impacting this area was the increase in interest rates in the current
period, which resulted in a corresponding increase in the Bank's interest
expense.  Interest on borrowings increased 72.1% to $3.4 million during the
nine months ended December 31, 2005, compared to $2.0 million for the
comparable period one year ago.  The increased expense in the current year was
a result of a higher average level of borrowings outstanding, which increased
to $124.0 million for the nine month period ended December 31, 2005 compared
to $80.2 million for the comparable period one year ago.  Increases in short
term market interest rates, as discussed previously, increased the interest
expense for the Bank's borrowings.

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.

Allowance for Loan Losses

                               For the                      For the
                          three months ended           nine months ended
                       December 31,  December 31,   December 31,  December 31,
                           2005          2004           2005          2004
                       -----------   -----------    -----------   -----------
                                           (In thousands)
Allowance at beginning
 of period              $13,161        $10,857        $11,767       $10,122
Provision for loan
 losses                     800            350          2,275           975
Charge offs, net of
 recoveries                 (36)           (39)          (117)           71
                        -------        -------        -------       -------
Allowance at end of
 period                  13,925         11,168         13,925        11,168
                        -------        -------        -------       -------
Allowance for loan
 losses as a percentage
 of net loans receivable
 at the end of the
 period                    1.50%          1.50%          1.56%         1.50%

Net charge-offs as a
 percentage of average
 loans outstanding
 during the period        0.004%         0.005%         0.013%       (0.010)%

     The provision for loan losses was $800,000 for the quarter ended December
31, 2005 compared to $350,000 for the quarter ended December 31, 2004.  This
change resulted from management's ongoing analysis of the growth of the loan
portfolio, changes in loan portfolio composition by collateral categories,
overall credit quality of the portfolio, peer group analysis, and current
economic conditions.  The allowance for loan losses was $13.9 million, or 1.6%
of net loans receivable at December 31, 2005, compared to $11.2 million, or
1.5% of net loans receivable at December 31, 2004.  The increased allowance
level resulted from continued loan portfolio growth in the higher-risk lending
categories of construction and land development, commercial real estate loans
and business loans during the period, which increased $140.4 million on a year
over year basis to $732.2 million, or 82.0% of the portfolio at December 31,
2005, versus $591.8 million, or 80.0% at December 31, 2004.

15

<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 of December 31, 2005, there were 13 loans on nonaccrual status.  At
December 31, 2005 total non-performing loans were $1.3 million.  The Bank had
no real estate owned at December 31, 2005.  Total non-performing assets
represented $1.3 million, or .12% of total assets at December 31, 2005
compared to $1.1 million or 0.12% of total assets at December 31, 2004.  The
non-performing figures for December 31, 2005 include one delinquent
residential real estate loan in the amount of $945,000.  The Bank does not
anticipate incurring a material loss from this loan.

                                                   As of December 31,
Non-Performing Assets                             2005            2004
                                                 ------          ------

                                                     (In thousands)

Accruing loans - 90 days past due                $    -          $  151
Non-accrual loans                                 1,287             964
                                                 ------          ------
Total non-performing loans                        1,287           1,115

Total non-performing loans/net loans               0.14%           0.15%

Real estate owned                                     -               -
                                                 ------          ------
Total non-performing assets                       1,287           1,115
                                                 ------          ------

Total non-performing assets/total assets           0.12%           0.12%

16

<PAGE>



Noninterest Income
------------------

     Noninterest income for the three months ended December 31, 2005 increased
10.6% to $1.7 million compared to $1.6 million for the quarter ended December
31, 2004.  Service fee income increased 53.2% to $1.2 million for the quarter
ended December 31, 2005 from $760,000 for the same quarter in the prior
period.  The primary reason for the increased fee income in the current period
was the implementation of our 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
$208,000 for the quarter ended December 31, 2005 from $221,000 in the
comparable period one year ago.  Other noninterest income for the quarter
decreased 35.5% to $377,000 for the quarter ended December 31, 2005 from
$584,000 for the three months ended December 31, 2004.  The primary reason for
the decrease from the prior year period was the recognition in the prior year
period of approximately $246,000 in profits on a real estate development
project from a joint venture of the Bank's wholly owned subsidiary, Westward
Financial Corp.

     Noninterest income for the nine months ended December 31, 2005 increased
slightly to $5.2 million for the nine months ended December 31, 2005 as
compared to the same period one year ago.  Service fee income increased 20.6%
to $2.9 million during the current nine month period from $2.4 million for the
comparable period one year ago, primarily as a result of the implementation of
our overdraft protection service and increase in deposits as discussed above
in the quarterly comparison.  The net gain on the sale of loans servicing
released increased 6.6% to $811,000 for the nine months ended December 31,
2005 from $761,000 in the comparable period one year ago.  The primary reason
for the increase was due to a higher amount of loans sold in the current
period.  The net gain on sales of investment securities decreased to $42,000
during the current nine month period from $471,000 for the comparable period
one year ago. The gains in these periods were primarily attributable to the
sale of selected securities from the Bank's investment portfolio.  Other
noninterest income was essentially unchanged at $1.4 million for the periods
ending December 31, 2005 and 2004.  Included in these numbers was the
recognition of approximately $300,000 in profits in the current period ended
December 31, 2005 compared to approximately $446,000 for the nine month period
ended December 31, 2004 on the real estate development project mentioned above
regarding Greenbriar Northwest LLC, a real estate joint venture.  As of
December 31, 2005 all lot sales have been concluded for this real estate
development project.

Noninterest Expense
-------------------

     Noninterest expense for the three months ended December 31, 2005
increased 15.9% to $6.7 million from $5.8 million for the comparable quarter
one year ago.  Increases in compensation and employee benefits and building
and occupancy expenses resulted from the opening of two full service retail
offices in Marysville and Lakewood and were the primary reasons for these
increases.  Compensation and employee benefits increased 15.1% for the quarter
ended December 31, 2005 to $3.8 million from $3.3 million for the comparable
quarter one year ago.  Building occupancy for the quarter ended December 31,
2005 increased 22.8% to $957,000 from $779,000 for the three months ended
December 31, 2004.

     Data processing expenses decreased 38.2% to $231,000 for the quarter
ended December 31, 2005 from $374,000 for the comparable quarter one year ago.
Prior period expenses included one time conversion related costs related to
the Bank's core processor conversion completed in November 2004.

     Noninterest expense for the nine months ended December 31, 2005 increased
14.1% to $19.1 million from $16.7 million for the nine months ended December
31, 2004.  Compensation and employee benefits increased 14.5% to $10.8 million
for the current period from $9.5 million.  Building occupancy expenses for the
current nine months increased 22.2% to $2.6 million from $2.1 million for the
comparable nine month period one year ago.  The reasons for these increases
relate to the opening of new retail offices of the Bank as discussed above in
the quarterly results.  Other expenses increased 15.9% to $4.4 million for the
nine months ended December 31, 2005 compared to $3.8 million for the prior
period one year ago as a result of additional expenses related to the Bank's
charter conversion, state regulatory exam, and increased Business & Occupation
tax due to the shifting loan portfolio from non-taxable mortgage loans to
taxable commercial loans.

17

<PAGE>



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, 2005, the
Corporation had no significant off-balance sheet derivative financial
instruments, nor did it have a trading portfolio of investments.  At December
31, 2005, 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,
2005.

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, 2005, 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, 2005, 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.

18

<PAGE>



PART II.  OTHER INFORMATION

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

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

The Company's common stock is traded on the NASDAQ National Market under the
symbol "HRZB".  As of December 31, 2005, there were 9,894,380 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 2005, the Board of Directors approved a new stock
repurchase plan that runs concurrent with the 2006 fiscal year, allowing the
Corporation to repurchase up to 10% of total shares outstanding, or
approximately 1.0 million shares.  This marked the Corporation's seventh stock
repurchase plan, which expires March 31, 2006.  During the quarter ended
December 31, 2005, the Corporation repurchased 29,451 shares at an average
price of $21.97 and for the nine-month period ended December 31, 2005, the
Corporation repurchased 202,552 shares at an average price of $20.32.

     The following table sets forth information about the Corporation's
purchases of its outstanding Common Stock during the quarter ended December
31, 2005.

                                                                (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, 2005 -
 October 31, 2005        5,100          $20.21       178,201       821,799
November 1, 2005 -
 November 30, 2005      12,465          $22.12       190,666       809,334
December 1, 2005 -
 December 31, 2005      11,886          $22.56       202,552       797,448

Total                   29,451          $21.97       202,552       797,448


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

Item 3.      Defaults Upon Senior Securities
                None

19

<PAGE>



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

Item 5.      Other Information
                None

Item 6.      Exhibits

             Exhibits
             --------
             (3.1)    Articles of Incorporation of Horizon Financial, Corp.
                      (incorporated by reference to Exhibit 3.1 to the
                      Registrant's Current Report on Form 8-K dated October
                      13, 1995)
             (3.2)    Bylaws of Horizon Financial Corp. (incorporated by
                      reference to Exhibit 3.2 to the Registrant's Current
                      Report on Form 8-K dated October 13, 1995)
             (10.1)   Amended and Restated Employment Agreement with V.
                      Lawrence Evans (incorporated by reference to the
                      Registrant's Annual Report on Form 10-K for the year
                      ended March 31, 1996)
             (10.2)   Deferred Compensation Plan (incorporated by reference to
                      the Registrant's Annual Report on Form 10-K for the year
                      ended March 31, 1996)
             (10.3)   1986 Stock Option and Incentive Plan (incorporated by
                      reference to Exhibit 99.1 to the Registrant's
                      Registration Statement on Form S-8 (File No. 33-99780))
             (10.4)   1995 Stock Option Plan (incorporated by reference to
                      Exhibit 99.2 to the Registrant's Registration Statement
                      on Form S-8 (File No. 33-99780))
             (10.5)   Bank of Bellingham 1993 Employee Stock Option Plan
                      (incorporated by reference to Exhibit 99 to the
                      Registrant's Registration Statement on Form S-8 (File
                      No. 33-88571))
             (10.6)   Severance Agreement with Dennis C. Joines (incorporated
                      by reference to the Registrant's Annual Report on Form
                      10-K for the year ended March 31, 2004)
             (10.7)   Severance Agreement with Richard P. Jacobson
                      (incorporated by reference to the Registrant's Quarterly
                      Report on Form 10-Q for the quarter ended June 30, 2002)
             (10.8)   Severance Agreement with Steven L. Hoekstra
                      (incorporated by reference to the Registrant's Quarterly
                      Report on Form 10-Q for the quarter ended June 30, 2002)
             (10.9)   Stock Incentive Plan (incorporated by reference to
                      Exhibit 99 to the Registrant's Registration Statement on
                      Form S-8 (File No. 333-127178))
             (10.10)  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)
             (10.11)  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)
             (10.12)  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

20

<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, 2006
                                     --------------------

21

<PAGE>



                                  Exhibit 31

                                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, 2006       /s/V. Lawrence Evans
                              --------------------------------
                              V. Lawrence Evans
                              Chairman, President, and Chief Executive Officer

22

<PAGE>



                                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, 2006       /s/Richard P. Jacobson
                              --------------------------------
                              Richard P. Jacobson
                              Chief Financial Officer, EVP

23

<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 as of the dates and for the periods presented in the
           financial statements included in such report.


/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, 2006

24

<PAGE>