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, 1998

                                    OR

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

     For the transition period from ______________ to _______________

                      Commission file number 0-27062

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


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


                                91-1695422
                     (IRS Employer Identification No.)


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


                                   98225
                                (Zip Code)


Registrant's telephone number including area code:           (360) 733-3050


     Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.  


                            YES   X   NO      

As of February 5, 1999, 7,496,294 common shares, $1.00 par value, were
outstanding.


<PAGE>
                          HORIZON FINANCIAL CORP.






INDEX                                                                   PAGE    

PART 1            FINANCIAL INFORMATION

Item 1            Financial Statements

                  Consolidated Statements of Financial Condition          1

                  Consolidated Statements of Operations                   2-3

                  Consolidated Statements of Stockholders' Equity         4

                  Consolidated Statements of Cash Flow                    5-6

                  Notes to Consolidated Financial Statements              7

Item 2            Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                   8-12





PART II           OTHER INFORMATION

Item 1            Legal Proceedings                                       13

Item 2            Changes in Securities                                   13

Item 3            Defaults Upon Senior Securities                         13

Item 4            Submission of Matters to a Vote of Security Holders     13

Item 5            Other Information                                       13

Item 6            Exhibits and Reports on Form 8-K                        13

SIGNATURES                                                                



<PAGE>
                         HORIZON FINANCIAL CORP.
              Consolidated Statements of Financial Condition


                                                   Dec. 31,      March 31,
                                                     1998          1998     
                                                 (unaudited)            
ASSETS:

         Cash and Due from Banks               $  7,383,137   $  6,878,615
         Interest-Bearing Deposits                4,271,516      9,980,349
         Investment Securities - Available 
           for Sale                              29,033,458     33,813,752
         Investment Securities-Held to Maturity     992,718      1,985,941
         Mortgage-Backed Securities - Available
           for Sale                              51,802,183     33,352,267
         Mortgage-Backed Securities - Held to
           Maturity                              12,080,990     15,488,523
         Loans Receivable                       466,392,956    433,697,267
         Accrued Interest and Dividends
           Receivable                             3,514,222      3,678,614
         Property and Equipment, Net              9,531,911      6,046,468
         Other Assets                             2,628,275      2,224,500
           Total Assets                        $587,631,366   $547,146,296

LIABILITIES:

         Deposits                              $471,869,430   $450,125,058
         Accounts Payable and Other     
           Liabilities                            4,618,183      7,925,825
         Other Borrowings                        16,608,000             -0-
         Advances by Borrowers for Taxes 
           and Insurance                            502,893        920,995
         Deferred Compensation                    1,263,825      1,275,000
         Net Deferred Income Tax Liabilities      3,262,585      2,879,728
         Federal income Tax Payable                 620,820        124,893
           Total Liabilities                    498,745,736    463,251,499

STOCKHOLDERS' EQUITY:

    Serial Preferred Stock, $1.00 Par Value,
          10,000,000 Shares Authorized;
          None Issued or Outstanding
    Common Stock, $1.00 Par Value,
      30,000,000 Shares Authorized;
      7,759,284 and 7,726,762 Issued
      and Outstanding                             7,759,284      7,726,762
    Paid-in Capital                              54,249,855     53,821,396
    Retained Earnings                            26,500,092     22,509,593
    Accumulated Other Comprehensive Income        3,878,868      3,135,677     
    Debt Related to ESOP                           (400,000)      (400,000)
    Treasury Stock-262,990 and 249,090 Held      (3,102,469)    (2,898,631)
 Total Stockholders' Equity                      88,885,630     83,894,797

       Total Liabilities and Stockholders'             
             Equity                            $587,631,366   $547,146,296


                    (See Notes to Financial Statements)
<PAGE>
                          HORIZON FINANCIAL CORP.
               CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


                                                      3 Months Ended 
                                                          Dec. 31
                                                    1998          1997   

INTEREST INCOME:
         Interest on Loans                     $  9,569,770   $  8,885,534
         Interest and Dividends on Investment
           and Mortgage-Backed Securities         1,404,825      1,486,292
              Total Interest Income              10,974,595     10,371,826

INTEREST EXPENSE:
         Interest on Deposits                     5,741,944      5,679,271
         Interest on Borrowings                     144,424              0
              Total Interest Expense              5,886,368      5,679,271
              Net Interest Income                 5,088,227      4,692,555

         Provision for Loan Losses                   75,000              0
              Net Interest Income After          
                Provision for Loan Losses         5,013,227      4,692,555

NON-INTEREST INCOME:
         Service Fees                               389,963        284,359
         Net Gain(Loss) on Sale of Loans           (112,979)      (144,233)
         Net Gain(Loss) on Sale of Investments            0         25,487
         Other                                      104,343         68,896
              Total Non-Interest Income             381,327        234,509

NON-INTEREST EXPENSE:
         Compensation and Employee Benefits       1,082,930        981,902
         Building Occupancy                         315,501        284,616
         FDIC Insurance                              13,976         13,704
         Data Processing                            136,902        116,875
         Advertising                                103,086         94,097
         Other Expenses                             449,765        296,885
              Total Non-Interest Expense          2,102,160      1,788,079

    Income Before Provision for
       Income Taxes                               3,292,394      3,138,985
         Provision for Income Taxes               1,118,082      1,065,245
         Net Income                               2,174,312      2,073,740

         Earnings Per Share                                      
           Basic Earnings Per Share                    $.29           $.28   
           Diluted Earnings Per Share                  $.29           $.27




                    (See Notes to Financial Statements)
<PAGE>

                          HORIZON FINANCIAL CORP.
               CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


                                                      9 Months Ended
                                                          Dec. 31
                                                    1998          1997   

INTEREST INCOME:
         Interest on Loans                     $ 27,910,903   $ 25,845,461
         Interest and Dividends on Investment
           and Mortgage-Backed Securities         4,338,609      4,564,166
              Total Interest Income              32,249,512     30,409,627

INTEREST EXPENSE:
         Interest on Deposits                    17,208,981     16,664,730
         Interest on Borrowings                     288,605              0 
              Total Interest Expense             17,497,586     16,664,730
              Net Interest Income                14,751,926     13,744,897

         Provision for Loan Losses                  395,000        180,000
              Net Interest Income After          
                Provision for Loan Losses        14,356,926     13,564,897

NON-INTEREST INCOME:
         Service Fees                             1,171,008        859,398
         Net Gain(Loss) on Sale of Loans           (249,661)      (236,534)     
         Net Gain(Loss) on Sale of Investments      304,866        422,949
         Other                                      274,740        192,509
              Total Non-Interest Income           1,500,953      1,238,322

NON-INTEREST EXPENSE:
         Compensation and Employee Benefits       3,153,131      2,995,387
         Building Occupancy                         914,522        845,166
         FDIC Insurance                              40,786         40,622
         Data Processing                            390,142        334,695
         Advertising                                317,700        302,016
         Other Expenses                           1,258,582      1,038,133
              Total Non-Interest Expense          6,074,863      5,556,019

    Income Before Provision for
       Income Taxes                               9,783,016      9,247,200
         Provision for Income Taxes               3,320,927      3,134,341
         Net Income                               6,462,089      6,112,859

         Earnings Per Share:
           Basic Earnings Per Share                    $.86           $.82
           Diluted Earnings Per Share                  $.85           $.81





                    (See Notes to Financial Statements)
<PAGE>



<TABLE>

                                      HORIZON FINANCIAL CORP.
                     Consolidated Statements of Changes in Stockholder's Equity
                               9 Months Ended December 31, 1998 and 1997
                                            (unaudited)





                                                                         
                             Common Stock      Additional                Accum Other     Debt 
                        Number                 Paid-In      Retained     Comprehensive   Related     Treasury
                        of Shares  at Par      Capital      Earnings     Income          to ESOP     Stock           Total   

<S>                     <C>        <C>         <C>          <C>          <C>             <C>         <C>           <C>
Balance at 3/31/97      6,650,340  $6,650,340  $40,063,678  $34,518,794  $  624,833      $(450,000)  $(2,898,631)  $78,509,014

Cash div on common stk
at $.32 per share                                            (2,379,472)                                            (2,379,472)

Stock opts exercised       35,342      35,342      234,668                                                             270,010

DRIP                       19,703      19,703      293,860                                                             313,563

Net change in other
comprehensive income                                                      2,040,852                                  2,040,852

15% stock dividend        997,952     997,952   13,035,748  (14,033,700)                                                   -0-

Cash paid for                                                                           
fractional shares                                                (8,934)                                                (8,934)

Net income                                                    6,112,859                                              6,112,859      

Balance at 12/31/97     7,703,337   7,703,337  $53,627,954  $24,209,547  $2,665,685     $(450,000)  $(2,898,631)   $84,857,892

Balance at 3/31/98      7,726,762   7,726,762  $53,821,396  $22,509,593  $3,135,677     $(400,000)  $(2,898,631)   $83,894,797

Cash div on common
stock at $.33 per sh.                                        (2,471,590)                                            (2,471,590)

Treasury stock 
purchased                                                                                              (203,838)      (203,838)

Stock opts. exercised       6,368       6,368       53,788                                                              60,156

DRIP                       26,154      26,154      374,671                                                             400,825

Net change in other
comprehensive income                                                        743,191                                    743,191    

Net income                                                    6,462,089                                              6,462,089

Balance at 12/31/98     7,759,284   7,759,284  $54,249,855  $26,500,092  $3,878,868     $(400,000)  $(3,102,469)   $88,885,630





                                (See Notes to Financial Statements)
</TABLE>
<PAGE>

                       HORIZON FINANCIAL CORP.

                 CONSOLIDATED STATEMENT OF CASH FLOWS



                                                           9 Months Ended
                                                               Dec. 31,

                                                         1998           1997

Cash Flows from Operating Activities:
    Net Income                                 $    6,462,089   $  6,112,859
    Adjustments to Reconcile Net Income
      Provided by Operating Activities
        Depreciation                                  383,629        333,984
        Amortization and Deferrals, Net               173,107         16,497  
        Provision for Loan Losses                     395,000        180,000
    Changes in Assets and Liabilities:
        Interest & Dividends Receivable               164,392        (14,905)
        Interest Payable                               31,497        (78,976) 
        Federal Income Taxes (rec) Payable            495,927        806,769
        Other Assets                                 (403,775)      (336,067) 
        Other Liabilities                          (3,768,416)    (4,153,904)

    Net Cash Flows from Operating Activities   $    3,933,450   $  2,866,257


Cash Flows From Investing Activities:
    Change in Interest-Bearing Deposits, Net   $    5,708,833  $   2,893,021
    Purchases of Investment Securities - AFS       (5,563,600)   (18,826,702)
    Proceeds from Sales and Maturities of 
      Investment Securities - AFS                  10,904,886     10,274,635
    Purchases of Investment Securities - HTM               -0-            -0- 
    Proceeds from Maturities of Investment 
      Securities - HTM                                993,223      3,378,288
    Purchases of Mtge Backed Securities - HTM              -0-            -0- 
    Purchases of Mtge Backed Securities - AFS              -0-    10,356,359
    Proceeds from Mat of Mtge Backed Sec - HTM      3,407,533      3,276,665
    Proceeds from Mat of Mtge Backed Sec - AFS     13,568,858     21,699,625
    Proceeds from Borrowings                       26,613,000             -0-
    Payment on Borrowings                         (10,005,000)            -0- 
    Proceeds from Sale of Loans                    25,222,775     24,760,566
    Principal Payments on Loans                    95,911,862     53,060,451
    Originations and Purchases of Loans          (185,852,151)  (104,026,434)
    Purchases of Bank Premises and
      Equipment                                    (3,869,072)      (268,791) 

    Net Cash Flows From Investing Activities:  $  (22,958,853)  $(14,135,035)




                  (See Notes to Financial Statements)
<PAGE>

                       HORIZON FINANCIAL CORP.

                 CONSOLIDATED STATEMENT OF CASH FLOWS






                                                           9 Months Ended
                                                               Dec. 31,

                                                         1998           1997

Cash Flows From Financing Activities:                   
  Change in Checking and                       
    Savings Accounts, Net                          10,617,573     (1,254,039) 
  Proceeds From Issuance of Time Deposits         110,841,327    119,928,577
  Payments for Maturing Time Deposits             (99,714,528)  (104,925,472)
  Common Stock Issued, Net                            460,981        583,573
  Cash Dividends Paid                              (2,471,590)    (2,388,406)
  Treasury Stock Purchased                           (203,838)            -0-
          Net Cash Flows from Financing
                 Activities                        19,529,925      11,944,233


Net Change in Cash and Cash Equivalents               504,522       675,455 

Cash and Cash Equivalents,
  Beginning of Year                                 6,878,615      4,416,862 

Cash and Cash Equivalents,
  End of Year                                      $7,383,137     $5,092,317



SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW INFORMATION 

Cash Paid During the Period for:

         Interest Expense                         $17,213,318    $16,743,706

         Income Taxes                             $ 2,825,000    $ 2,335,000

<PAGE>


                      HORIZON FINANCIAL CORP.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1998
                           (unaudited)


NOTE A - Basis of Presentation

The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim financial statements.  The results
of operations for the periods ended December 31, 1998 and 1997 are not
necessarily indicative of the operating results for the full year.  The 
March 31, 1998, consolidated statement of financial condition presented with 
the interim financial statements was audited and received an unqualified 
opinion.  For further information, refer to the consolidated financial 
statements and footnotes thereto included in the Bank's annual report for 
the year ended March 31, 1998.

On October 13, 1995, Horizon Bank, a savings bank, ("Bank") reorganized into
the holding company form of ownership ("Reorganization"), resulting in 
the Registrant becoming the sole stockholder of the Bank.  Each outstanding 
share of common stock of the Bank and options to acquire shares of common 
stock of the Bank, became outstanding shares of common stock of the 
Registrant and options to acquire shares of common stock of the Registrant, 
respectively, as a result of the Reorganization.  The consolidated financial 
statements for the three months and nine months ended December 31, 1998,
include the accounts of Horizon Financial Corp., the Bank and other sub-
sidiaries of the Bank.  Significant intercompany balances and transactions
have been eliminated in consolidation.

Prior to Reorganization, Horizon Financial Corp. had no material assets or
liabilities and engaged in no business activity.  Subsequent to the
acquisition of the bank, Horizon Financial Corp. has engaged in no 
significant activity other than holding the stock of the Bank. 


NOTE B - Net Income Per Share

Earnings per share for the three months ended December 31, 1998 and 1997 are
calculated on the basis of 7,490,851 and 7,445,497 weighted average shares
outstanding, respectively.  Diluted earnings per share for the three months 
ended December 31, 1998 and 1997 are calculated on the basis of 7,553,924 and
7,558,375 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.


NOTE C - Reclassification

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

<PAGE>
                     HORIZON FINANCIAL CORP.

               MANAGEMENT'S DISCUSSION AND ANALYSIS



General

The Corporation was formed under Washington law on May 22, 1995, and became
the holding company of the Bank, effective October 13, 1995.  As a bank
holding company, the Corporation has a number of additional options and
operating advantages over the Bank.  These include, but are not limited to: 
expanded business diversification options; flexibility in acquisitions; and
the ability to repurchase its own stock without incurring the adverse tax
consequences of recapturing portions of the Bank's bad debt reserve. 

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
then converted to a state-chartered stock savings bank.  The primary business
of the Bank is to acquire funds in the form of savings deposits and to use 
the funds to make loans secured by residential and commercial properties in 
the Bank's primary market area.  The Bank's operations are conducted through
twelve full-service office facilities, located in Whatcom, Skagit and
Snohomish counties in northwest Washington.  

At its March 26, 1996, meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 655,000 shares) of the Corporation's 
outstanding common stock over a 24-month period.  This authorization ended in 
March of 1998.  At its March 19, 1998 meeting, the Board of Directors authorized
the repurchase of up to 10% (approximately 747,000 shares) of the Corporation's
outstanding common stock over the subsequent 24 month period.  During the nine 
months ended December 31, 1998, the Corporation repurchased 13,900 shares of its
common stock.  This repurchase plan has been rescinded by the Board of Directors
effective January 18, 1999 with the signing of the definitive agreement to
merge with Bellingham Bancorporation as discussed below.

As of December 11, 1998, the Bank became a member of the Federal Home Loan Bank
of Seattle.  Membership with the FHLB will provide the Bank with wholesale 
funding opportunities to supplement retail deposits in order to meet mortgage
loan demand and lengthen liabilities for protection against interest rate risk.

On January 18, 1999, the Corporation announced a definitive agreement to merge
with Bellingham Bancorporation, creating a company with combined assets in 
excess of $652 million.  As a result of the transaction, Bellingham 
Bancorporation will be merged into Horizon Financial Corp.  The acquisition will
be accomplished in an all stock offer valued at approximately $15.5 million,
including the assumption of outstanding Bellingham Bancorporation stock options
and warrants.  According to the terms of the definitive agreement, the 
Corporation will exchange 2.74 shares of its common stock for each Bellingham
Bancorporation share.  The acquisition, which has been approved by the Board of
Directors of each company, is subject to, among other contingencies, approval by
regulators and Bellingham Bancorporation shareholders.  The transaction is 
expected to close by June 1, 1999.  Horizon Financial Corp. expects the merger
to be accretive to earnings within one year of combined operations.  The 
transaction is expected to be accounted for as a pooling of interests.

Financial Condition

Total consolidated assets for the Corporation as of December 31, 1998, were
$587,631,366, an increase of 7.40% from the March 31, 1998 level of
$547,146,296.  This increase in assets was due primarily to the growth in
loans receivable, which increased 7.54% to $466,392,956 at December 31, 1998,
from $433,697,267 at March 31, 1998. 

Total liabilities increased 7.66% to $498,745,736 at December 31, 1998, from
$463,251,499 at March 31, 1998.  The increase in liabilities was due 
in part to the growth in savings deposits, which increased 4.83% to
$471,869,430 from $450,125,058.  Also contributing to the growth in liabilities
was an increase in Other Borrowings to $16,608,000 at December 31, 1998, 
compared to -0- Other Borrowings at March 31, 1998.

Total stockholders' equity increased 5.95% to $88,885,630 at December 31,
1998, from $83,894,797 at March 31, 1998.

<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, 1998, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $23,073,079.

As of December 31, 1998, the total amortized cost of investments and mortgage-
backed securities was $88,032,276 compared to a market value of $94,270,863,
resulting in an unrealized gain of $6,238,587.  On March 31, 1998, the amortized
cost of investments and mortgage-backed securities was $79,889,458 compared
to a market value of $84,958,025, resulting in an unrealized gain of $5,068,567.
The primary reasons for this difference at December 31, 1998, compared to
March 31, 1998, was the overall lower level of interest rates which increased
the valuation of the Bank's investment portfolio, along with increases in the
value of the Bank's common stock holdings.  

The Bank's primary sources of funds are cash flow from operations, which
consist primarily of mortgage loan repayments; deposit increases; loan sales;
and cash received from the maturity or sale of investment securities.  These
funds are primarily used to originate mortgage loans on real estate. 

The Bank's liquidity fluctuates with the supply of funds, and management
believes that the current level of liquidity is adequate at this time.  If
additional liquidity is needed, the Bank's options include, but are not
necessarily limited to: (1) selling additional loans in the secondary market;
(2) advances from the Federal Home Loan Bank of Seattle; (3) reverse repurchase 
agreements; (4) accepting additional jumbo and/or public funds deposits; or 
(5) accessing the discount window of the Federal Reserve Bank of San Francisco.

Stockholders' equity to total assets was 15.13% as of December 31, 1998, well
in excess of the 5.0% minimum required by the FDIC in order to be considered
well capitalized.  


     
                       Comparative Results of Operations
                      For the Three and Nine Months Ended
                          December 31, 1998 and 1997



Net Interest Income

Net interest income for the three months ended December 31, 1998, increased
8.43% to $5,088,227 from $4,692,555 in the same time period of the previous
year. Interest on loans was the primary reason for this change, increasing 7.70%
to $9,569,770 from $8,885,534.  This increase was due to an active quarter for 
loan originations (particulary refinances) which resulted in increased loan 
fee recognition during the quarter.  Interest and dividends on investments and 
mortgage-backed securities decreased 5.48% to $1,404,825 from $1,486,292 for the
comparable quarter a year ago.  This is primarily due to the lower level of 
interest rates and the lack of significant growth in the Bank's security 
portfolio compared to the growth in loans receivable.  Available funds were used
primarily to fund mortgages during the period, istead of purchasing investments 
for the investment portfolio.  Total interest income increased 5.81% to 
$10,974,595 from $10,371,826.  This increase is primarily attributable to an 
overall increase in interest-earning assets over the prior period.  

<PAGE>

Total interest paid on deposits increased 1.10% to $5,741,944 from $5,679,271. 
This increase in interest expense is due to the overall deposit growth of the 
Bank, along with increasing competition facing the Bank in attracting deposits.
Interest on borrowings increased to $144,424 during the quarter compared to -0-
for the comparable period one year ago.  During the quarter, the Bank borrowed
additional funds in the wholesale markets using repurchase agreements and FHLB
advances.  The Bank's management intends to further utilize wholesale funding in
the future, as appropriate opportunities arise.

Net interest income for the three months ended December 31, 1998, after
provision for loan losses, increased 6.83% to $5,013,227 from $4,692,555.  
Provisions for loan losses increased to $75,000 for the quarter ended December 
31, 1998, from -0- for the same period one year ago.  The Bank had one loan in 
the amount of $323,468 listed as over 90 days delinquent at December 31, 1998. 

Net interest income for the nine-month period ended December 31, 1998,
increased 7.33% to $14,751,926 from $13,744,897 for the comparable period one
year ago.  Total interest income increased 6.05% to $32,249,512 from 
$30,409,627, due primarily to the increase in the Bank's earning assets.  Total 
interest expense for the nine-month period increased 5.00% to $17,497,586 from
$16,664,730.  As discussed above, this increase is due to the overall growth
of the Bank, along with wholesale market borrowings and FHLB advances utilized
during the period.  Net interest income after provisions for loan losses 
increased 5.84% to $14,356,926 from $13,564,897.


Non Interest Income

Non interest income for the three months ended December 31, 1998, increased
62.61% to $381,327 from $234,509 for the same time period a year ago.  Service
fee income increased 37.14% to $389,963 from $284,359.  This is due in 
part to the increase in servicing fee income on loans which have been sold or
securitized in the secondary market, along with increases in fee income as a
result of a productive quarter in terms of loan volume.  The net gain/loss on
the sale of loans showed a loss of $112,979 during the quarter, compared to a
loss of $144,233 in the comparable period one year ago.  These losses were due
primarily to the sale of approximately $15 million in 30 year fixed rate 
mortgage loans during the quarter.  When the Bank sells loans, the gains or 
losses related to the loan balances and the prices received in the secondary
market are reflected as non-interest income.  When the Bank sells low coupon,
long-term fixed rate mortgages to reduce its interest rate risk exposure, the 
non-interest income portion of the income statement may show a loss.  The 
remaining outstanding fees associated with these mortgages, however, flow to the
income statement as interest income.  Therefore, even when the non-interest 
income portion of the sale reflects a loss, it is possible that the loan sales
(including the fee recognition) generate an overall profit to the Bank.  The net
profit on the sale of loans for the quarter (including fee recognitions) ended 
December 31, 1998 was $10,183.  Other non interest income for the quarter ended 
December 31, 1998 increased 51.45% to $104,343 from $68,896.  Contributing to 
this change was an increase in VISA debit card fee income during the quarter, 
along with an adjustment of $25,000 in specific loan loss reserves due to a 
payoff of a loan with an allocated reserve.

<PAGE>

Non interest income for the nine months ended December 31, 1998, increased
21.21% to $1,500,953 from $1,238,322.  Service fee income increased 36.26% to 
$1,171,008 from $859,398, due primarily to the increased service fee income from
loans sold, and increased fee income related to loan production, as discussed
above. The net gain/loss on sale of loans showed a loss of $249,661 during the
nine months ended December 31, 1998, compared to a loss of $236,534 in the prior
period.  The net profit on the sale of loans for the nine months ending December
31, 1998, inclusive of the deferred fee recognition, was $114,365.  The net 
gain/loss on sale of investment securities decreased 27.92% to $304,866 from 
$422,949.  The gains during both of these periods can be attributed primarily to
the sale of selected common stocks from the Bank's portfolio.  Other non 
interest income for the nine months ended December 31, 1998 increased 42.72% to 
$274,740 from $192,509, due primarily to the reasons stated above in the 
discussion regarding the quarterly results.


Non Interest Expense

Non interest expense for the three months ended December 31, 1998, increased
17.57% to $2,102,160 from $1,788,079.  Compensation and employee benefits
increased 10.29% to $1,082,930 from $981,902 due primarily to the overall
growth of the Bank. Building occupancy for the quarter ended December 31, 1998,
increased 10.85% to $315,501 from $284,616.  The Bank's FDIC insurance expense 
for the quarter ended December 31, 1998 was little changed at $13,976, compared
to $13,704 paid in the quarter one year ago. Data processing increased 17.14% to
$136,902 for the quarter ended December 31, 1998, from $116,875, due primarily 
to the overall growth of the Bank.  Advertising expenses increased 9.55% to 
$103,086 for the quarter, from $94,097.  Other non interest expenses increased 
51.49% to $449,765 from $296,885, due to the overall growth of the Bank and
expenses related to upgrading the Bank's computer systems.

Non interest expense for the nine months ended December 31, 1998, increased
9.34% to $6,074,863 from $5,556,019.  Compensation and employee benefits
increased 5.27% to $3,153,131 from $2,995,387.  Building occupancy expenses for 
the nine months increased 8.21% to $914,522 from $845,166.  FDIC insurance 
expenses were basically unchanged for the nine month period ended December 31, 
1998, at $40,786 compared to $40,622 for the prior period. Data processing 
expenses increased 16.57% to $390,142 from $334,695, due primarily to the growth
of the Bank.  Advertising expenses for the nine month period ended December 31,
1998 increased 5.19% to $317,700 from $302,016. Other expenses increased 21.24%
for the nine-month period to $1,258,582 from $1,038,133.  The primary reasons 
for these differences was due to the overall growth of the Bank and expenses 
related to upgrading the Bank's computer systems.



<PAGE>

Year 2000 Compliance

The Year 2000 computer problem involves the way in which a computer will 
interpret the Year 2000 when expressed as "00".  Many computer systems, if left
unchanged, will interpret "00" as the year 1900, rather than as the Year 2000.  
This problem could affect you in many ways.  We want you to understand what
Horizon Bank is doing to address the issue.

First, Horizon is working hard at testing its computers and software programs
for compliance with the Year 2000.  Second, we are working with our data
processor, Fiserv, as well as our other vendors, to make sure that all of their
computers and software programs have been tested for the Year 2000.  Lastly, we 
are working with our banking regulators to complete the mandatory testing of our
systems well in advance of the change of the century.

In addition, over the past several months, the Bank has replaced or upgraded 
most of its personal computers, which should assist in the year 2000 compliance
efforts since computers with older BIOS chips are more likely to be susceptible
to Year 2000 issues than newer machines.  The Bank has decided, however, that
all the new computers being purchased will be tested for Year 2000 compliance.

The Bank also conducted an extensive test of its interface with its service
provider, Fiserv, in December 1998.  The test was successful and produced very
satisfactory results.  Based on these results, management does not feel that 
there are any serious problems relating to Year 2000 that would impact the 
Bank's ability to deliver products and services to our customers.  The Bank will
also have the opportunity to perform additional tests with Fiserv in April 1999,
as needed.  In addition to preparing for testing, the Bank is currently in the
process of refining its contingency plan for the Year 2000.  This will be an 
ongoing process as the Bank contines to prepare for the turn of the century.  
Costs associated with Year 2000 compliance testing were under $30,000 for the 
nine months ended December 31, 1998.  Any future expenses relating to Year 2000
are not anticipated to have a material impact on the Bank's financial 
statements.

Given the amount of media attention that has been focused on the Year 2000 
computer problem, we understand that this is an emotional and upsetting issue 
for many people.  It is important, however, to realize that this is not the 
first time Horizon has had to deal with the Year 2000 computer problem.  
Horizon, and its data processor, first had to deal with the issue in 1970 when
the Bank was originating 30-year mortgages that would mature in the Year 2000
and beyond.  And again, in 1990, the Bank dealt with the issue when it offered
10-year certificates of deposit that would mature in the Year 2000.  In each
case, the issue was resolved successfully.

Forward Looking Statements

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

<PAGE>

PART II.  OTHER INFORMATION



Item 1.     Legal Proceedings

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

Item 2.     Changes in Securities

            None

Item 3.     Defaults Upon Senior Securities

            None

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

            None

Item 5.     Other Information

            None

Item 6.     Exhibits and Reports on Form 8-K

            January 22, 1999 - Announcement of signing of Definitive Agreement
            to merge with Bellingham Bancorporation









<PAGE>














                                  SIGNATURES


    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. 



                             HORIZON FINANCIAL CORP.



                             By:  /s/ V. Lawrence Evans
                                  V. Lawrence Evans
                                  President and Chief Executive Officer  


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



                             Dated:  February 11, 1998





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