SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C.  20549

                             -------------------------

                                      FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the Fiscal Year Ended March 31, 2003         OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                          Commission File Number: 0-27062

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

          Washington                                        91-1695422
-----------------------------------------------      -------------------------
(State or other jurisdiction of incorporation           (I.R.S. Employer
 or organization)                                          I.D. Number)


1500 Cornwall Avenue, Bellingham, Washington                  98225
-----------------------------------------------      -------------------------
(Address of principal executive offices)                    (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:    None
                                                               ----

Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, par value $1.00 per share
                   ---------------------------------------
                                (Title of Class)

     Indicate by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.   YES   X    NO
                                                     -----    -----

     Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K.  YES        NO   X
                                                    -----     -----

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).    YES   X    NO
                                            -----    -----

     The aggregate market value of the voting stock held by nonaffiliates of
the registrant, based on the closing sales price of the registrant's Common
Stock as quoted on the Nasdaq Stock Market under the symbol "HRZB" on June 6,
2003, was $154,132,936 (9,937,649 shares at $15.51 per share).

                     DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of the Registrant's Proxy Statement for the 2003 Annual
Meeting of Stockholders. (Parts II. and III).

<PAGE>



                                   PART I

Item 1.  Business
-----------------

(a) General
    -------

     Horizon Financial Corp. ("Horizon Financial" or the "Corporation") was
formed under Washington law on May 22, 1995, and became the holding company
for Horizon Bank ("Horizon Bank" or the "Bank"), effective October 13, 1995.
Effective June 19, 1999 the Corporation completed the acquisition of
Bellingham Bancorporation, a $64.3 million, bank holding company for the Bank
of Bellingham, which was merged with and into Horizon Bank. At March 31, 2003,
the Corporation had total assets of $819.9 million, total deposits of $646.7
million and total equity of $106.2 million. The Corporation's business
activities generally are limited to passive investment activities and
oversight of its investment in the Bank.  Accordingly, the information set
forth in this report, including consolidated financial statements and related
data, relates primarily to the Bank and its subsidiary.

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

     The Bank's operations are conducted through 16 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington.  The acquisition of Bellingham Bancorporation in June 1999
increased Horizon Financial's and Horizon Bank's presence in Whatcom County.
During fiscal 2000, the Bank purchased a bank site in Marysville, which will
provide additional growth opportunities.  In fiscal 2002, the Bank acquired a
bank site in Lynnwood, Washington, which was remodeled and opened for business
in March 2003.  Future plans for the Bank include the opening of commercial
loan centers in Bellingham, Snohomish and Everett during the first quarter of
fiscal 2004.

     The Corporation has had various buy-back programs since August 1996.  At
its October 2000 meeting, the Board of Directors authorized the repurchase of
up to 10% (approximately 1,121,250 shares, as restated) of the Corporation's
outstanding common stock ("Common Stock") over a 24 month period.  In total,
the Corporation repurchased 769,059 shares under the plan at an average price
of $9.88 per share.

     At its October 22, 2002 meeting, the Board of Directors authorized its
fourth repurchase plan for up to 10% (approximately 1,065,000, as restated) of
the Corporation's outstanding common stock over a 12 month period.  During the
fiscal year ended March 31, 2003, the Corporation repurchased 195,700 shares
of its Common Stock at an average price of $14.16 per share.

Recent Developments
-------------------

     Recently Issued Accounting Standards.   In November 2002, the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others.  The Interpretation elaborates on the
disclosures to be made by sellers or guarantors of products and services, as
well as those entities guaranteeing the financial performance of others.  The
Interpretation further clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the obligations it has
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of the Interpretation are effective on a prospective
basis to guarantees issued or modified after December 31, 2002, and the
disclosure requirements are effective for financial statements of periods
ending after December 15, 2002.  The Corporation believes that its disclosures
with regards to these matters are adequate as of March 31, 2003.

                                      1

<PAGE>



     In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities.  The Interpretation explains how to identify
variable interest entities and how an enterprise assesses its interest in a
variable interest entity to decide whether to consolidate that entity.  This
Interpretation requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved.  Variable interest entities
that effectively disperse risks will not be consolidated unless a single party
holds an interest or combination of interest that effectively recombines risks
that were previously dispersed.   This Interpretation applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.  Implementation of this
statement did not result in a material impact on its financial position or
results of operations.

     In April of 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.  This statement amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for heding
activities under FASB No. 133, Accounting for Derivative Instruments and
Hedging Activities.  The statement is effective for certain contracts entered
into or modified after June 30, 2003, and for certain hedging relationships
designated after June 30, 2003.  Implementation of this statement is not
expected to have an impact on the Corporation's financial condition or results
of operations.

Lending Activities
------------------

     General.  The Bank's loan portfolio, net totaled $582,269,145 at March
31, 2003, representing approximately 71.02% of its total assets.  On that
date, 34.52% of total outstanding loans consisted of loans secured by
mortgages on single family residential properties, 3.58% of the loans
consisted of loans secured by two-to- four unit residential properties, 9.78%
of total outstanding loans consisted of loans secured by mortgages on over
four unit residential properties, and 38.04% of total outstanding loans
consisted of commercial loans and commercial real estate loans.  The balance
of the Bank's outstanding loans at that date consisted of secured and
unsecured consumer loans and loans secured by savings deposits.

     The Bank originates both fixed rate and adjustable rate mortgages
("ARMs") secured by residential, business, and commercial real estate, the
majority of which include building improvements.

     The Bank has no significant concentration of credit risk other than that
a substantial portion of its loan portfolio is secured by real estate located
in the Bank's primary market area, which the Bank considers to be Whatcom,
Skagit and Snohomish Counties in Washington.  This concentration of credit
risk could have a material adverse effect on the Bank's financial condition
and results of operations to the extent there is a material deterioration in
the counties' economic and real estate values.

     In order to have the ability to make the yields on its loan portfolio and
investments more interest rate sensitive, the Bank has implemented a number of
measures.  Those measures include: (i) adoption of a policy under which the
Bank generally originates long-term, fixed-rate mortgage loans when such loans
are written to specifications promulgated by the Federal Home Loan Mortgage
Corporation ("FHLMC") and qualify for sale in the secondary market, (ii)
origination of ARM loans on residential and commercial properties subject to
market conditions, (iii) origination of variable rate commercial and consumer
loans, and (iv) increased emphasis on originating shorter term loans for its
portfolio, and selling much of its long-term mortgage loan production into the
secondary market.

                                      2

<PAGE>


<PAGE>
<TABLE>

     The following table provides selected data relating to the composition of the Bank's loan portfolio by
type of loan on the dates indicated.

                                                            At March 31,
                              ----------------------------------------------------------------------------
                                  2003            2002           2001            2000             1999
                              ------------   ------------   ------------     ------------     ------------

                           <c>            <c>            <c>             <c>              <c>
Type of Loan:
First mortgage loans:
  One-to-four family......... $350,487,597   $493,097,739   $619,394,856    $ 606,702,881    $ 564,394,944
  One-to-four family
    construction.............   28,035,560     29,958,286     26,715,987       25,911,941       23,817,577
  Participations sold........ (137,172,801)  (228,874,332)  (246,582,822)    (176,537,497)    (163,526,986)
                              ------------   ------------   ------------     ------------     ------------
      Subtotal...............  241,350,356    294,181,693    399,528,021      456,077,325      424,685,535

  Commercial construction/
    land development.........   66,111,738     55,746,760     30,364,368       18,716,744        2,505,484
  Residential commercial
    real estate..............   56,929,901     28,603,971     24,186,903       21,999,357       18,158,927
  Nonresidential commercial
    real estate..............  182,157,758    169,696,803    139,232,200       88,322,611       74,120,509
  Commercial loans...........   54,132,254     37,844,119     20,221,122       14,472,300       19,293,804
  Home equity secured........   22,729,371     18,873,309     19,834,618       16,952,862       13,499,198
  Other consumer loans.......    6,886,950      5,263,284      2,530,851        4,829,230        5,216,800
                              ------------   ------------   ------------     ------------     ------------
      Subtotal...............  630,298,328    610,209,939    635,898,083      621,370,429      557,480,257

Less:
  Deferred loan fees.........   (4,844,929)    (5,612,704)    (6,745,573)      (7,397,782)      (7,203,886)
  Loan loss reserve..........   (8,506,133)    (5,887,482)    (4,976,670)      (4,757,152)      (4,463,305)
  Loans in process...........  (34,678,121)   (30,406,272)   (26,793,487)     (19,631,956)     (12,163,897)
                              ------------   ------------   ------------     ------------     ------------
                              $582,269,145   $568,303,481   $597,382,353     $589,583,539     $533,649,169
                              ============   ============   ============     ============     ============
</TABLE>

<TABLE>

     Loan Maturity.  The following table sets forth certain information at March 31, 2003 regarding the
dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less.  Loan balances are net of undisbursed loan proceeds, unearned
discounts, unearned income and allowance for loan
losses.


                                                        Due After
                                     Due Within         1 Through          Due Over
                                   One Year After     5 Years After      5 Years After
                                   March 31, 2003     March 31, 2003     March 31, 2003        Total
                                   --------------     --------------     --------------    -------------
                                                                 (In thousands)

                                  <c>                 <c>                <c>              <c>
Commercial, financial and
  agricultural.................       $ 73,647           $ 69,365           $104,765          $247,777
Real estate construction.......             --                 --             28,036            28,036
Real estate-mortgage,
  installment and other........         57,397             68,969            180,090           306,456
                                      --------           --------           --------          --------
     Total.....................       $131,044           $138,334           $312,891          $582,269
                                      ========           ========           ========          ========
</TABLE>

                                      3

<PAGE>



     The following table sets forth the dollar amount of all loans due within
one year after March 31, 2003 which have fixed interest rates and have
floating or adjustable interest rates.  Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income, and allowance
for loan losses.

                                                Adjustable
                                Fixed Rates        Rates         Total
                                -----------        -----         -----
                                              (In thousands)

Commercial, financial and
  agricultural...............    $108,440        $ 65,690      $174,130
Real estate construction.....      18,248           9,788        28,036
Real estate-mortgage,
  installment and other......     199,319          49,740       249,059
                                  -------        --------      --------
    Total....................    $326,007        $125,218      $451,225
                                  =======        ========      ========

     Residential Loans.  The primary lending activity of the Bank has
historically been the granting of conventional loans to enable borrowers to
purchase existing homes or construct new homes.  The Bank's real estate loan
portfolio also includes loans on two-to-four family dwellings, multi-family
housing (over four units), and loans made to purchase or refinance improved
buildings to be used for residential housing.  At March 31, 2003,
approximately 41.90% of the Bank's total loan portfolio consisted of loans
secured by residential real estate.

     The Bank's lending practices generally limit the maximum loan-to-value
ratio on one-to-four family residential mortgage loans to 97% of the appraised
value as determined by an independent appraiser, with the condition that
private mortgage insurance generally be required on any home loans with
loan-to-value ratios in excess of 80% of the appraised value.  The Bank places
this insurance with carriers approved by the FHLMC.  The coverage generally
limits the Bank's exposure to 72% of the loan amount.  If private mortgage
insurance is required, the borrower pays the premium at loan closing and any
recurring premiums through an escrow reserve account established with the Bank
for such period of time as the Bank requires the insurance coverage to be in
force.  Multi-family residential and commercial real estate loans and
unimproved real estate loans generally do not exceed 80% of appraised value.

     The Bank presently originates both fixed-rate and ARMs secured by
one-to-four family properties with a loan term not exceeding 30 years.  Under
certain conditions, ARM borrowers are allowed to convert beginning on the
first interest rate change date and ending on the fifth interest rate change
date from the date of the loan note.  In addition, certain consumer safeguards
are built into the ARM instruments used by the Bank.  These safeguards include
limits on annual and lifetime interest rate adjustments.  The Bank generally
originates these loans in accordance with guidelines established by the FHLMC.
For the fiscal year ended March 31, 2003, adjustable mortgage loans totaled
$45,556,130 or 14.44% of total originations as compared to $14,386,260 or
5.75% of total originations for the year ended March 31, 2002.

     Construction Loans.  The Bank also provides construction financing for
single-family dwellings and to a lesser extent makes land acquisition and
development loans on properties intended for residential use.  The interest
rate charged by the Bank on these loans varies depending upon the type of
security property and the creditworthiness of the borrower.  At March 31,
2003, the Bank had $94,147,298, or 14.94% of total loans outstanding in
construction loans, as compared to $85,705,046, or 14.05% of total loans at
March 31, 2002.  At March 31, 2003, $66,111,738 or 70.22% of the construction
loan portfolio consisted of "speculative" construction loans (i.e., loans on
dwellings for which there is not an underlying contract for sales).

     Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential permanent lending because
of the inherent difficulty in estimating both a property's value at completion
of the project and the estimated cost of the project.  The nature of these
loans is such that they are generally more difficult to evaluate and monitor.
If the estimate of value proves to be inaccurate, the Bank may be confronted
at, or prior to, the maturity of the loan, with a project whose value is
insufficient to assure full repayment.  Loans for the construction of

                                      4

<PAGE>



speculative homes carry more risk because the payoff for the loan is dependent
on the builder's ability to sell the property prior to the time that the
construction loan is due.

     Multi-Family, Business and Commercial Loans.  These types of loans
constituted $293,219,913 or approximately 46.52% of Horizon Bank's loan
portfolio at March 31, 2003.  These loans include fixed rate and adjustable
rate mortgages secured by apartment buildings (i.e., those containing five or
more living units) and business and commercial properties.  The Bank generally
requires that such loans have a debt service coverage of 1.20 to 1 with a
loan-to-value ratio not exceeding 80%.  Fixed-rate loans generally have a
three to 15-year loan term, with payments based upon a 15 to 30-year
amortization schedule.

     At March 31, 2003, $120,493,651 of loans secured by income-producing
properties have an interest rate which adjusts  based upon changes in an index
of United States Treasury securities published by the Board of Governors of
the Federal Reserve System ("Federal Reserve") or other widely recognized
indices.

     Multi-family residential and business and commercial real estate lending
is generally considered to involve a higher degree of risk than permanent
residential one-to-four family lending.  Such lending typically involves large
loan balances concentrated in a single borrower or groups of related
borrowers.  In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and thus may be subject to a greater extent
to adverse conditions in the real estate market or the economy in general.
Horizon Bank generally attempts to mitigate the risks associated with
multi-family commercial and residential real estate lending by, among other
things, lending on collateral located in its market area and generally to
individuals who reside in its market.

     The Bank's loan portfolio also includes a wide range of commercial loans
to small and medium sized businesses.  This portfolio presently includes lines
of credit with floating rates and maturities of one year or less and term
loans for the purchase of equipment, real estate and other operating purposes
with maturities generally not exceeding ten years.  These loans are secured by
a variety of business assets including equipment, real estate, accounts
receivable and inventory.  Under certain conditions, the Bank also offers
unsecured  credit to qualified borrowers.

     Commercial lending carries increased risks compared to residential
mortgage lending due to the heavy reliance upon the future income of the
customer and the uncertain liquidation value of the collateral.  In the event
of default, the liquidation of collateral is often insufficient to cover the
outstanding debt.  To mitigate these inherent risks, the Bank combines a
conservative lending policy with experienced lending personnel responsible for
the ongoing management of their assigned accounts.

     Consumer Loans.  The Bank makes a variety of loans for consumer purposes.
Included among these are home equity loans, home equity lines of credit, loans
secured by personal property, such as automobiles, boats, and other vehicles,
loans secured by deposit accounts, unsecured loans, and loans for mobile homes
located in parks.

     Horizon Bank actively markets consumer loans in order to provide a wider
range of financial services to its customers and to achieve shorter terms and
higher interest rates normally typical of such loans.  At March 31, 2003, the
Bank held $29,616,321 of consumer loans.

     Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles, boats and other vehicles.  In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation.  The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment.  In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy.  Furthermore, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans.

                                      5

<PAGE>



     Consumer loans are made based on an evaluation of the borrower's
creditworthiness, including income, other indebtedness, and satisfactory
credit history, and the value of the collateral.  Designated managers or Loan
Committee members approve consumer loan requests.

     Secured loan amounts typically do not exceed 90% of the value of the
collateral, or 90% of the appraised value of the residence in the case of home
equity loans.

     Loan Solicitation and Processing. The primary sources for loan
originations are attributable to deposit customers, current borrowers, walk-in
customers, and referrals from existing customers, real estate agents, and
builders.  The Bank does not actively utilize mortgage brokers in the
origination of loans.

     The Bank accepts completed loan applications from all of its offices.
Processing is substantially centralized in the main office of the Bank.
Detailed  information is obtained to determine the creditworthiness of the
borrower and the borrower's ability to repay.  The more significant items
appearing on the applications and accompanying material are verified through
the use of written credit reports, financial statements, and confirmations.
After analysis of the loan application, supporting documents and the property
to be pledged as loan security, including an appraisal of the property by
either a staff appraiser or an independent fee appraiser, the application is
forwarded to the Bank's Loan Committee.  Loan approval requires the signatures
of two members of the Loan Committee.  The Loan Committee consists of officers
of the Bank who are appointed by the Bank's Board of Directors.  The Bank
generally requires its mortgage notes to be co-signed individually by the
principals on loans made to entities other than natural persons.  Certain
lending personnel have been given limited loan approval authority by the Board
of Directors covering secondary market quality loans not exceeding 80% to
value.

     Loan assumption requests of adjustable rate loans are handled by the Bank
in a manner similar to new loan requests.  FHLMC standards are generally
applied to each request and full credit underwriting is required. For fixed
rate loans, a sale or transfer of the secured property generally results in
the Bank enforcing its due on transfer rights contained in the mortgage
instrument.

     Residential Loan Originations, Purchases and Sales.  Currently, the Bank
emphasizes the origination of 15 to 30 year fixed rate loans on terms and
conditions which will permit them to be sold in the secondary market, while
originating ARM loans and shorter term fixed-rate loans for its own portfolio.

     In addition to originating loans, Horizon Bank may purchase real estate
loans in the secondary market.  The Bank's purchases in the secondary market
depend upon the demand for mortgage credit in the local market area and the
inflow of funds from traditional sources.  Loan purchases enable the Bank to
utilize funds more quickly, particularly where sufficient loan demand is not
obtainable locally.

     The Bank is a qualified servicer for both FHLMC and Fannie Mae.  The
Bank's general practice is to close its fixed-rate, one-to-four family
residential loans on FHLMC loan documents in order to facilitate future sales
to the mortgage corporation as well as to other institutional investors.  From
time to time, depending upon interest rates and economic conditions, the Bank
has sold participation interests in loans in order to provide additional funds
for lending, to generate servicing fee income and to decrease the dollar
amount of its intermediate and long-term fixed-rate loans.  The sale of loans
in the secondary mortgage market reduces the Bank's interest rate risk and
allows the Bank to continue to make loans during periods when savings flows
decline or funds are otherwise unavailable for lending purposes.  As of March
31, 2003, the Bank was servicing loans for others aggregating approximately
$140,535,316 for which it generally receives a fee payable monthly of 0.25% to
0.375% per annum of the unpaid balance of each loan.  In February 2001, the
Bank began selling much of its current loan production on a servicing released
basis, and plans to continue doing so for many of the long-term fixed rate
loan originations.  All sales of loan interests by the Bank are made without
right of recourse to the Bank by the buyer of the loan interests in the event
of default by the borrower.

     Loan Commitments.  The Bank is a party to financial instruments with
off-balance-sheet risk (loan commitments) made in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates.  Loan commitments involve, to
varying degrees, elements of credit and interest-

                                      6

<PAGE>



rate risk in excess of the amount recognized in the balance sheet.  The
contract amounts of those commitments reflect the extent of the Bank's
exposure to credit loss from these commitments.  The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.

     Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee.  Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty.  Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment; and income-producing commercial properties.

     Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.  Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions.  Except
for certain long-term guarantees, the majority of guarantees expire in one
year.  The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
Collateral supporting those commitments, for which collateral is deemed
necessary, generally amounts to one hundred percent of the commitment amount
at March 31, 2003.

     The following is a summary of the off-balance-sheet financial instruments
or contracts outstanding as of the dates indicated.

                                                As of March 31,
                                               ------------------
                                               2003          2002
                                               ----          ----

  Commitments to extend credit............ $58,878,487   $36,331,803
  Credit card arrangements................   7,385,414     6,896,030
  Standby letters of credit...............   1,263,217       348,463

     Loan Origination and Other Fees.  In addition to interest earned on
loans, the Bank receives loan origination fees for originating loans.  Loan
origination fees are a percentage of the principal amount of the mortgage loan
which are charged to the borrower at the closing of the loan.

     The Bank's loan origination fees are generally 0% to 2.5% on conventional
residential mortgages and 1.0% to 2.0% for commercial real estate loans.  The
total amount of deferred loan origination fees and unearned discounts at March
31, 2003 was $4,844,929.  Any unamortized loan fees are recognized as income
at the time the loan is sold or paid off.

     Income from loan origination and commitment fees varies with the volume
and type of loans and commitments made and purchased and with competitive
conditions in mortgage markets, which in turn responds to the demand for and
availability of money.  The Bank experiences an increase in loan fee income
and other fee income, such as appraisal and loan closing fees, during periods
of  low interest rates due to the resulting demand for mortgage loans.  The
Bank also receives other fees and income from charges relating to existing
loans, which include late charges, and fees collected in connection with a
change in terms or other loan modifications.  These fees and charges have not
constituted a material source of income.

     Loan Modifications.  The Bank offers a loan modification program to
assist existing customers who are considering refinancing their home loans.
For a fee the Bank will modify customers' loans under the program.  No new
principal is required and only the interest rate and payment amounts are
changed.  All other terms and conditions remain the same.  In fiscal 2003, the
Bank modified $66,288,304 of real estate loans, compared to $14,968,652 in
fiscal 2002.


                                      7

<PAGE>




     Delinquent Loans, Loans in Foreclosure and Foreclosed Property.  Loans
are defined as delinquent when any payment of principal and/or interest is
past due.  While the Bank generally is able to work out a satisfactory
repayment schedule with a delinquent borrower, the Bank will undertake
foreclosure proceedings if the delinquency is not otherwise resolved within 90
days.  Property acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until such time as it
is sold or otherwise disposed of.  At March 31, 2003, the Bank had nine loans
over 90 days delinquent and two loans on nonaccrual status.  At March 31, 2003
total non-performing loans were $591,966.  Real estate owned at March 31, 2003
totaled $1,072,341.  Total non-performing assets represented $1,664,307, or
0.20% of total assets at March 31, 2003. Management does not anticipate
incurring material losses from these loans.

     The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.

                                                 At March 31,
                             ----------------------------------------------
                             2003       2002      2001       2000      1999
                             ----       ----      ----       ----      ----

Non-accrual loans........ $ 242,451  $     -- $      --  $  455,000 $      --
Loans 90 days or more
 delinquent and
 accruing interest.......   349,515   618,346   832,299     456,729   383,000
Restructured loans.......        --        --        --          --        --
Real estate acquired
  through foreclosure.... 1,072,341   339,429        --     323,468        --
                         ----------  --------  --------  ----------  --------
   Total.................$1,664,307  $957,775  $832,299  $1,235,197  $383,000
                         ==========  ========  ========  ==========  ========
As a percentage of
 net loans...............      0.29%     0.17%     0.14%       0.21%     0.07%
As a percentage of
 total assets............      0.20%     0.12%     0.11%       0.17%     0.06%

     Additional interest income which would have been recorded had nonaccruing
loans been current in accordance with their original terms was immaterial as
of March 31, 2003.  No interest income was recorded on nonaccrual loans for
the year ended March 31, 2003.

     Reserves for Losses.  The Bank operates under a general loan loss reserve
system.  The provision for loan losses is maintained at a level sufficient to
provide for estimated loan losses based on evaluating known and inherent risks
in the loan portfolio.  These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for
which full collectibility may not be assured, and determination of the
existence and realizable value of the collateral and guarantees securing the
loans.  The reserve is based upon factors and trends identified by management
at the time financial statements are prepared, but the ultimate recovery of
loans is susceptible to future market factors beyond the Bank's control, which
may result in losses or recoveries differing significantly from those provided
for in the financial statements.

     The Bank maintains an allowance for credit losses sufficient to absorb
losses inherent in the loan portfolio.  The Bank has established a systematic
methodology to ensure that the allowance is adequate. The Bank reviews the
following information, on a quarterly basis, to estimate the necessary
additions to its loan loss reserve:

     .    All loans classified during the previous analysis. Current
          information as to payment history, or actions taken to correct the
          deficiency are reviewed, and changes are made, as appropriate.  If
          conditions have not improved, the loan classification is reviewed to
          ensure that the appropriate action is being taken to mitigate loss.

     .    All loans past due on scheduled payments.   The Bank reviews all
          loans that are past due 30 days or more, taking into consideration
          the borrower, nature of the collateral and its value, the
          circumstances that have caused the delinquency, and the likelihood
          of the borrower correcting the conditions that have resulted in the
          delinquent status.


                                      8

<PAGE>



     .    Composition of the Bank's portfolio.  The Bank also analyzes its mix
          of loans when establishing appropriate allowances for loan losses.
          For example, reserves for losses on the Bank's one-to-four family
          mortgage portfolio (on a percentage basis) are lower than the
          percentage reserve estimates for commercial or credit card loans.
          Therefore, the Bank's allowance for loan losses is likely to change,
          as the composition of the Bank's loan portfolio changes.

     .    Current economic conditions. The Bank takes into consideration
          economic condition in its market area, the state's economy, and
          national economic factors that could influence the quality of the
          loan portfolio in general.

     .    Trends in the Bank's delinquencies.  Prior period statistics are
          reviewed and evaluated to determine if the current conditions
          warrant changes to the Bank's loan loss allowance.

     The amount that is to be added to allowance for loan losses is based upon
a variety of factors.  Many financial institutions establish required reserves
based, to a great extent, upon their own experience.  The Bank's loan
portfolio has traditionally consisted primarily of loans secured by single
family homes, and as a result, the loss experience has been minimal.

     Each individual loan, previously classified by management, or newly
classified during the quarterly review, is evaluated for loss potential, and a
specific amount or percentage deemed to be at risk is added to the overall
required reserve amount.  For the remaining portion of the portfolio, a
reserve factor is applied that is consistent with the Bank's experience in
that portfolio or with industry guidelines if management believes such
guidelines are more appropriate. The applied percentage is also influenced by
other economic factors as noted in the beginning of this section.

     The calculated amount is compared to the actual amount recorded in the
allowance at the end of each quarter and a determination is made as to whether
the allowance is adequate.  Management increases the amount of the allowance
for loan losses by charges to income and decreases the amount by loans charged
off (net of recoveries).

     The following comments represent management's view of the risks inherent
in each portfolio category.

     .    One- to Four-Family Residential - Market conditions in the Bank's
          primary market area have, over the long term, supported a stable or
          increasing market value of real estate.  Absent an overall economic
          downturn in the economy, experience in this portfolio indicates that
          losses are minimal provided the property is reasonably maintained,
          and marketing time to resell the property is relatively short.


     .    Multi-Family Residential - While there have been minimal losses
          taken in this segment of the portfolio, the rental market is
          susceptible to the effects of an economic downturn.   While the Bank
          monitors loan-to-value ratios, the conditions that would create a
          default would carry through to a new owner which may require that
          the Bank discount the property or hold it until conditions improve.

     .    Commercial Real Estate - As with multi-family loans, the classifi-
          cation of commercial real estate loans closely corresponds to
          economic conditions which will limit the marketability of the
          property, resulting in higher risk than a loan secured by a
          single-family residence.  Commercial real estate loans have
          historically been assigned higher reserve levels than one-to-four
          family residential loans, but lower than commercial business loans.

     .    Commercial Business Loans - These types of  loans carry a higher
          degree of risk, relying on the ongoing success of the business to
          repay the loan.   Collateral for commercial credits is often
          difficult to secure, and even more difficult to liquidate in the
          event of a default.  If a commercial business loan demonstrates any
          credit weakness, the reserve is increased to recognize the
          additional risk.

     .    Consumer Loans - The consumer loan portfolio has a wide range of
          factors, determined primarily by the nature of the collateral and
          the credit history and capacity of the borrower.   The loans tend to
          be

                                      9

<PAGE>



          smaller in principal amount and secured by second deeds of trust,
          automobiles, boats, and other vehicles.  Loans for automobiles,
          boats, and other vehicles, generally experience higher than average
          wear in the environment and hold a higher degree of risk of loss in
          the event of repossession.

     .    Unsecured Credit Cards - Due to the unsecured nature of these
          accounts, these types of loans represent the highest degree of risk.
          The Bank, therefore, uses a higher percentage factor than any
          other loan classification, when estimating future potential loan
          losses.

     Management believes that the allowance for loan losses at March 31, 2003
was adequate at that date.  Although management believes that it uses the best
information available to make these determinations, future adjustments to the
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially
from the assumptions used in making the determinations.

     While the Bank believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principles, there
can be no assurance that regulators, in reviewing the Bank's loan portfolio,
will not request the Bank to increase significantly its allowance for loan
losses.  In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the
existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result
of the factors discussed above.  Any material increase in the allowance for
loan losses may adversely affect the Bank's financial condition and results of
operations.

     The Bank established an allowance for losses for the year ended March 31,
2003 in the amount of $8,506,133 and $5,887,482 for the year ended March 31,
2002.  The Bank's loan loss reserve as of March 31, 2003, was approximately
1.46% of net loans receivable.

     The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.

<TABLE>
                                                         Year Ended March 31,
                                -------------------------------------------------------------------------
                                   2003          2002           2001             2000             1999
                                ----------    ----------     ----------       ----------       ----------

                             <c>           <c>            <c>              <c>              <c>
Allowance at beginning
  of period..................   $5,887,482    $4,976,670     $4,757,152       $4,463,305       $4,085,203
Provision for loan losses....    2,740,000     1,089,642        320,000          437,234          484,500
Recoveries:
  First mortgage loans.......           --            --             --               --               --
  Commercial loans...........           --            --             --               --               --
  Credit card loans..........        8,057         3,965          1,146              753               --
  Other consumer loans.......           --         4,300             --               --               --
                                ----------    ----------     ----------       ----------       ----------
    Total recoveries.........        8,057         8,265          1,146              753               --

Charge-offs:
  First mortgage loans.......           --       (27,800)       (60,000)         (89,750)         (50,000)
  Commercial loans...........      (53,915)     (147,642)       (21,505)         (10,773)         (40,000)
  Credit card loans..........      (71,780)       (5,410)       (20,123)         (42,896)         (16,398)
  Other consumer loans.......       (3,711)       (6,243)            --             (721)              --
  Total charge-offs..........     (129,406)     (187,095)      (101,628)        (144,140)        (106,398)

  Net charge-offs............     (121,349)     (178,830)      (100,482)        (143,387)        (106,398)
                                ----------    ----------     ----------       ----------       ----------
Allowance at end of period...   $8,506,133    $5,887,482     $4,976,670       $4,757,152       $4,463,305
                                ==========    ==========     ==========       ==========       ==========



                                                       (table continues on following page)
</TABLE>

                                      10

<PAGE>



<TABLE>
                                                         Year Ended March 31,
                                -------------------------------------------------------------------------
                                   2003          2002           2001             2000             1999
                                ----------    ----------     ----------       ----------       ----------

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

Allowance for loan losses
  as a percentage of total
  loans outstanding at the
  end of the period..........      1.35%         0.96%          0.78%            0.77%            0.80%

Net charge-offs as a
  percentage of average
  loans outstanding during
  the period ................      0.02%         0.03%          0.02%            0.02%            0.02%

Allowance for loan losses
  as a percentage of non-
  performing loans at
  end of period..............    511.09%       614.70%        597.94%          385.13%        1,165.35%

</TABLE>

<TABLE>
  The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated.

                                                         At March 31,
                 ----------------------------------------------------------------------------------------
                        2003             2002               2001              2000             1999
                 ----------------  ----------------   ----------------  ----------------  ---------------
                           Percent          Percent            Percent           Percent          Percent
                          of Loans         of Loans           of Loans          of Loans         of Loans
                          in Each          in Each            in Each           in Each          in Each
                          Category         Category           Category          Category         Category
                          to Total         to Total           to Total          to Total         to Total
                 Amount    Loans   Amount   Loans     Amount    Loans   Amount    Loans   Amount   Loans
                 ------    -----   ------   -----     ------    -----   ------    -----   ------   -----
                                                         (Dollars in thousands)

             <c>        <c>   <c>         <c>   <c>        <c>   <c>         <c>   <c>         <c>
Commercial,
 financial and
 agricultural..$6,365,123  74.8% $3,353,260  51.6% $1,922,537  37.4% $1,187,327  27.0% $1,457,155  24.5%
Residential
 real
 estate-
 mortgage...... 2,141,010  25.2   2,534,222  48.4   3,054,133  62.6   3,569,825  73.0   3,006,150  75.5

               ---------- -----   ---------- -----  ---------- -----  ---------- -----  ---------- -----
   allowance
   for loan
   losses......$8,506,133 100.0%  $5,887,482 100.0% $4,976,670 100.0% $4,757,152 100.0% $4,463,305 100.0%
               ========== =====   ========== =====  ========== =====  ========== =====  ========== =====

</TABLE>

     The Bank had an allowance of $0, $50,000, $0, $0, and $0 for real estate
acquired through foreclosure at March 31, 2003, 2002, 2001, 2000 and  1999.

Investment Activities
---------------------

     Under Washington law, savings banks are permitted to own U.S. government
and government agency obligations, commercial paper, corporate bonds, mutual
fund shares, debt and equity obligations issued by creditworthy entities,
whether traded on public securities exchanges or placed privately for
investment purposes.  The Bank holds a diverse portfolio of money market
instruments, United States Treasury obligations, federal agency securities,
municipal securities, common stock, preferred stock and corporate notes.

     The FDIC has adopted the Federal Financial Institutions Examination
Council statement of policy on securities activities and accounting
procedures.  This policy requires that institutions establish prudent policies
and strategies for securities activities, identify certain securities trading
practices that are unsuitable for an investment portfolio, recommends
procedures for selection of a securities dealer, and limits investment in high
risk mortgage securities and disproportionately large holdings of long-term
zero coupon bonds.

     The policy addresses concerns about speculative or other non-investment
activities in the securities investment portfolios of depository institutions.
Speculative securities activities can impair earnings or capital and, in some
cases,

                                      11

<PAGE>




may cause the failure of the institution.  The policy establishes a framework
for structuring securities activities and clarifies various accounting issues
concerning investment accounts versus trading accounts.

     The amortized cost of the above investments at March 31, 2003 was
$66,575,954 compared to a market value of $74,962,821.  For further
information concerning the Bank's investment securities portfolio, see Note 3
of the Notes to the Consolidated Financial Statements contained in the
Corporation's Proxy Statement for the 2003 Annual Meeting of Stockholders
("Proxy Statement").

     The Bank also invests in mortgage-backed securities.  At March 31, 2003,
such securities had an amortized cost of $39,933,682 and a market value of
$40,904,935.

     The following table presents the amortized cost of the Bank's investment
securities portfolio and short-term investments.  The market value of the
Bank's investment securities portfolio at March 31, 2003 was approximately
$115,867,756.  This does not include interest-bearing deposits and cash
equivalents.

                                                At March 31,
                                ----------------------------------------
                                  2003             2002            2001
                                --------         --------        -------
                                              (In thousands)
Investment securities:
 U.S. Government:
  Available for sale........   $  38,821        $  23,587      $   4,879
  Held to maturity..........         369              369            369
                                --------         --------        -------
                                  39,190           23,956          5,248
Asset-backed securities(1):
  Available for sale........      37,141           29,453         46,978
  Held to maturity..........       2,793            4,410          6,530
                                --------         --------        -------
                                  39,934           33,863         53,508
Other securities(2):
  Available for sale........      27,386           17,031         10,988
  Held to maturity..........          --               --             --
                                --------         --------        -------

                                  27,386           17,031         10,988
                                --------         --------        -------
   Total investments........     106,510           74,850         69,744
Interest bearing deposits
 and cash equivalents.......      75,013           83,962         24,508
                                --------         --------        -------
                                $181,523         $158,812        $94,252
                                ========         ========        =======
--------
(1)  Consists of mortgage-backed securities and CMO's.
(2)  Consists of corporate debt securities and marketable equity securities.

     At March 31, 2003, the Bank did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.

                                      12

<PAGE>


<TABLE>
    The following table sets forth the scheduled maturities, amortized cost, market values and average
yields for the Bank's investment securities at March 31, 2003.

                                                        At March 31, 2003*
                     --------------------------------------------------------------------------------------
                        One Year      One to Five    Five to Ten      More than             Total
                        or Less          Years          Years         Ten Years      Investment Securities
                     -------------   -------------   ------------   --------------   ----------------------
                     Amor-   Aver-   Amor-   Aver-   Amor-  Aver-   Amor-    Aver-   Amor-            Aver-
                     tized    age    tized   age     tized  age     tized    age     tized    Market  age
                     Cost    Yield   Cost    Yield   Cost   Yield   Cost     Yield   Cost     Value   Yield
                     ----    -----   ----    -----   ----   -----   ----     -----   ----     -----   -----
                                                      (Dollars in thousands)

               <c>       <c>    <c>      <c>    <c>    <c>    <c>       <c>    <c>       <c>       <c>
U.S. Government,
agency securities,
state and political
subdivisions:
 Available for
   sale........... $ 2,091   4.14%  $33,881  4.34%  $2,198  3.03%  $   651   4.30%  $ 38,821 $ 40,709  4.25%
 Held to maturity.      --     --       369  4.30       --    --        --     --        369      402  4.30
                   -------   ----   -------  ----   ------  ----   -------   ----   -------- -------- -----
                     2,091   4.14    34,250  4.34    2,198  3.03       651   4.30     39,190   41,111  4.25
Mortgage-backed
securities:
 Available for
   sale...........     397   5.92    11,974  5.23    1,033  3.58    23,737   4.92     37,141   37,921  5.00
 Held to maturity.       3  12.85       188  7.65    2,241  6.39       361   9.19      2,793    2,984  6.84
                   -------   ----   -------  ----   ------  ----   -------   ----   -------- -------- -----
                       400   5.95    12,162  5.27    3,274  5.50    24,098   4.99     39,934   40,905  5.13

Other:
 Available for
   sale...........  11,822   5.00    14,573  2.04       --    --       991   6.20     27,386   33,852  3.47
 Held to maturity.      --     --        --    --       --    --        --     --         --       --    --
                    11,822   5.00    14,573  2.04       --    --       991   6.20     27,386   33,852  3.47
                   -------   ----   -------  ----   ------  ----   -------   ----   -------- -------- -----
 Total............ $14,313   4.90%  $60,985  3.98%  $5,472  4.51%  $25,740   5.02%  $106,510 $115,868  4.38%
                   =======   ====   =======  ====   ======  ====   =======   ====   ======== ======== =====
_____________________
*   At March 31, 2003, yields on the Bank's tax-exempt obligations had not been computed on a tax equivalent
    basis.

</TABLE>

                                      13

<PAGE>



Savings Activities and Other Sources of Funds
---------------------------------------------

     General.  Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes.  In addition to deposit accounts, the Bank derives
funds from loan repayments, loan sales, and other borrowings and operations.
The availability of funds from loan sales is influenced by general interest
rates and other market conditions.  Loan repayments are a relatively stable
source of funds while deposit inflows and outflows vary widely and are
influenced by prevailing interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in
deposits or deposit inflows at less than projected levels and may be used on a
longer term basis to support expanded lending activities.

     Deposits.  Horizon Bank offers several deposit accounts, including
Regular Passbook and Statement Savings Accounts, Personal and Business
Checking Accounts, Money Market with and without Check Access and Certificates
of Deposit Accounts with maturities ranging from 30 days up to 10 years.
Certificates of Deposit account requirements vary according to minimum
principal balances, the time period the funds must remain on deposit and the
interest rate determined for each term and minimum balance.

     The following table sets forth certain information concerning the
deposits at the Bank.


<TABLE>                                       Year Ended March 31,
                                    2003                   2002                      2001
                             -----------------      ------------------       ------------------
                                      Weighted                Weighted                 Weighted
                             Average  Average       Average   Average        Average   Average
        Type                 Balance   Rate         Balance    Rate          Balance    Rate
-----------------------      -------   ----         -------    ----          -------    ----
                                               (Dollars in thousands)

                         <c>       <c>          <c>         <c>          <c>        <c>
Savings..................   $ 36,652   1.19%       $ 33,676    2.06%        $ 33,299    2.98%
Checking.................     82,516   0.60          69,457    0.82           60,360    1.20
Money Market.............    126,080   1.75          95,280    2.80           74,696    3.87
Time Deposits............    391,576   3.73         406,920    5.20          407,641    6.10
                            --------   ----        --------    ----         --------    ----
  Total..................   $636,824   2.79%       $605,333    4.14%        $575,996    5.09%
                            ========   ====        ========    ====         ========    ====
</TABLE>


     The following table indicates the amount of the Bank's deposits by time
remaining until maturity as of March 31, 2003 of $100,000 or more.

                                                Certificates
               Maturity Period                   of Deposit
      ---------------------------------          ----------
                                               (In thousands)

      Three months or less.............          $ 28,384
      Three through six months.........            28,234
      Six through twelve months........            22,903
      Over twelve months...............            50,096
                                                 --------
         Total.........................          $129,617
                                                 ========


     The Bank has a number of different programs designed to attract both
short-term and long-term savings of the general public by providing a wide
assortment of accounts and rates.  The program includes traditional passbook
accounts; nonnegotiable time deposits with minimum deposits of $100,000 and
terms of 30 days to five years called Jumbo Certificates of Deposit;
nonnegotiable, nontransferable time deposits with minimum deposits of $500 and
terms from 30 days to five years at fixed rates; 12-month to 10-year variable
rate fixed term certificates; Individual Retirement Accounts (IRAs); Qualified
Retirement Plans; transaction accounts such as regular checking; MMDAs with
and without limited check access.

                                      14

<PAGE>



     The Bank's practice on early withdrawal penalties is applicable only to
time deposits.  Management believes that in periods of rising interest rates
this practice will discourage depositors from making premature withdrawals for
the purpose of reinvesting in higher rate time deposits.

     The minimum amount required to open a time deposit varies from $500 to
$100,000, depending on the type of time deposit.  Pricing of rates on time
deposits with maturities from 30 days to 10 years are determined periodically
by the Bank, based upon competitive rates and local market rates, national
money market rates, and yields on assets of the same maturity.

     The Bank's personal MMDA currently has a $1,000 minimum deposit and has a
tiered pricing program, with interest rates that vary by account dollar
balance -- $2,500, $10,000, $25,000, $50,000 and higher.  The Bank's Business
MMDA has tiers of $2,500, $10,000, $50,000, $100,000 and higher, with a $1,000
minimum deposit.  These accounts have no maturity requirements, no regulatory
interest rate ceilings, and limited check writing privileges.  The interest
rates on these accounts are adjusted by the Bank periodically, based on money
market conditions.   The Bank currently has a $10,000 minimum deposit (ULT)
money market and has a tiered pricing program, with interest rates that vary
by account dollar balance -- $10,000, $25,000, $50,000 and higher.  The Bank
also offers a $25,000 minimum deposit (ULT PLUS) money market and has a tiered
pricing program, with interest rates that vary by account dollar balance --
$25,000, $50,000, $100,000 and higher. These accounts have no maturity
requirements, no regulatory interest rate ceiling, and no check writing
privileges.  The interest rates on the account are adjusted by the Bank
periodically or as dictated by money market conditions.

     The large variety of deposit accounts offered by the Bank has increased
the Bank's ability to retain deposits and has allowed it to be competitive in
obtaining new funds, although the threat of disintermediation (the flow of
funds away from the Bank into direct investment vehicles, such as common
stocks and mutual funds) still exists.  The ability of the Bank to attract and
retain deposits and the Bank's cost of funds have been, and will continue to
be, significantly affected by capital and money market conditions.

     Horizon Bank attempts to control the flow of deposits by pricing its
accounts to remain competitive with other financial institutions in its market
area but does not necessarily seek to match the highest rates paid by
competing institutions.

     The senior officers of the Bank meet periodically to determine the
interest rates which the Bank will offer to the general public.  Such officers
consider the amount of funds needed by the Bank on both a short-term and
long-term basis, the rates being offered by the Bank's competitors,
alternative sources of funds and the projected level of interest rates in the
future.

     The Bank's deposits are obtained primarily from residents of Northwest
Washington.  Horizon Bank attracts deposits by offering a wide variety of
services and convenient branch locations and service hours.  The Bank has not
solicited brokered deposits and has no present intention to attract such
deposits in the future.

     For further information concerning the Bank's savings deposits, reference
is made to Note 9 of the Notes to the Consolidated Financial Statements
contained in the Corporation's Proxy Statement.

     Borrowings.  In December 1998, the Bank joined the Federal Home Loan Bank
of Seattle providing access to a variety of wholesale funding options.  In
addition, the Bank's security portfolio provides additional borrowing capacity
in the reverse repurchase markets.  The Bank also has other borrowed funds in
the form of retail repurchase agreements.  The agreements are collateralized
by securities held by a safekeeping agent not under control of the Bank.
These advances are considered overnight borrowings bearing interest rates that
fluctuate daily based on current market rates.  At March 31, 2003, the Bank
had $53.8 million in borrowings, compared to $29.1 million at March 31, 2002
and $22.9 million in borrowings during the year ended 2001.  Access to these
wholesale borrowings allows management to meet cyclical funding needs, and
assists in interest rate risk management efforts.

                                      15

<PAGE>



     See Note 11 of the Notes to the Consolidated Financial Statements
contained in the Corporation's Proxy Statement for borrowings by the Bank.

Competition
-----------

     The Bank faces strong competition in its market area in originating loans
and attracting deposits.  Competition in originating loans is primarily from
other thrift institutions, commercial banks, mortgage companies, credit unions
and consumer finance companies.  The Bank competes for loan originations
primarily through interest rates and loan fees it charges and through the
efficiency and quality of services it provides borrowers.  Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions and current interest rate levels.

     In attracting deposits, the Bank competes primarily with other thrift
institutions, commercial banks and credit unions.  The Bank competes for
customer deposits principally on the basis of convenience and quality of its
banking services and the investment opportunities that satisfy the
requirements of investors with respect to rate of return, liquidity, risk and
other factors.  The primary factors in competing for deposits are interest
rates and the convenience of office locations.  In light of the deregulation
of interest rate controls on deposits, the Bank has faced increasing
competition for deposits from commercial banks, other thrift institutions and
non-regulated financial intermediaries.

Personnel
---------

     At March 31, 2003, Horizon Bank employed 210 full-time and 30 part-time
employees.  Horizon Bank employees are not represented by any collective
bargaining agreement.  Management of Horizon Bank considers its relations with
its employees to be good.

                       REGULATION AND SUPERVISION

The Bank
--------

     General.  As a state-chartered, federally insured bank, Horizon Bank is
subject to extensive federal and state regulation.  Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards.  Horizon Bank is
regularly examined by the FDIC and the Washington Department of Financial
Institutions, Division of Banks, and files periodic reports concerning the
Bank's activities and financial condition with its regulators.  The Bank's
relationship with depositors and borrowers also is regulated to a great extent
by both federal and state law, especially in such matters as the ownership of
deposit accounts and the form and content of loan documents.  The law and
regulations of the State of Washington pertaining to banks and other
corporations apply to the Bank.  Among other things, those laws and
regulations govern the Bank's investments and borrowings, loans, payment of
interest and dividends, and establishment and relocation of branch offices.

     Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of depository institutions.
The FDIC administers two separate deposit insurance funds: the BIF and the
SAIF.  The BIF is a deposit insurance fund for commercial banks and some
state-chartered savings banks.  The SAIF is a deposit insurance fund for most
savings associations.  The Bank is insured under the BIF fund.  As an insurer
of the Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over the Bank.

     The FDIC has established a risk-based system for setting deposit
insurance assessments.  Under the risk-based assessment system, an
institution's insurance assessment varies according to the level of capital
the institution holds, the balance of insured deposits during the preceding
two quarters, and the degree to which it is the subject of supervisory
concern.  In addition, regardless of the potential risk to the insurance fund,
federal law requires the ratio of reserves to insured deposits at $1.25 per
$100.  Both funds currently meet this reserve ratio.  Since 1997, the
assessment rate for both SAIF and BIF deposits has ranged from zero to 0.27%
of covered deposits.  As a well capitalized bank, Horizon Bank qualified for
the lowest rate on its deposits for 2003.

                                      16

<PAGE>



     In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Financing
Corporation ("FICO") to service FICO debt incurred in the 1980's to help fund
the thrift industry cleanup.  The FICO assessment rate is adjusted quarterly.

     Prior to 2000, the FICO assessment rate for BIF-insured deposits was
one-fifth the rate applicable to deposits insured by the SAIF.  Beginning in
2000, SAIF- and BIF-insured deposits were assessed at the same rate by FICO.
As a result, BIF FICO assessments will be higher than in previous periods
while SAIF FICO assessments will be lower.  For the first quarter of 2003, the
annualized rate was 1.68 cents per $100 of insured deposits.  Because the Bank
is insured under the BIF fund, the FICO assessments have increased since 2000
as compared to prior years.

     Any insured bank which does not operate in accordance with or conform to
FDIC regulations, policies and directives may be sanctioned for
non-compliance.  For example, proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank who engages in
unsafe and unsound practices, including the violation of applicable laws and
regulations.  The FDIC has the authority to terminate deposit insurance
pursuant to procedures established for that purpose.   Management is not aware
of any existing circumstances that could result in termination of the deposit
insurance for the Bank.

     Capital Requirements. FDIC regulations recognize two types or tiers of
capital: core ("Tier 1") capital and supplementary ("Tier 2") capital.  Tier 1
capital generally includes common stockholders' equity and noncumulative
perpetual preferred stock, less most intangible assets.  Tier 2 capital, which
is limited to 100 percent of Tier 1 capital, includes such items as qualifying
general loan loss reserves, cumulative perpetual preferred stock, mandatory
convertible debt, term subordinated debt and limited life preferred stock;
however, the amount of term subordinated debt and intermediate term preferred
stock (original maturity of at least five years but less than 20 years) that
may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.

     The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios.  The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average
total assets.  Most banks are required to maintain a minimum leverage ratio of
at least 4% to 5% of total assets.  The FDIC retains the right to require a
particular institution to maintain a higher capital level based on an
institution's particular risk profile.  The Bank's leverage ratio was 12.44%
as of March 31, 2003.

     FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets.  Assets are placed in
one of four categories and given a pecentage weight -- 0%, 20%, 50% or 100% --
based on the relative risk of that category.  In addition, certain
off-balance-sheet items are converted to balance-sheet credit equivalent
amounts, and each amount is then assigned to one of the four categories.
Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2
capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1
capital to risk-weighted assets must be at least 4%.  The Bank has calculated
its total risk-based ratio to be 18.70% as of March 31, 2003, and its Tier 1
risk-based capital ratio to be 17.03%.  In evaluating the adequacy of a bank's
capital, the FDIC may also consider other factors that may affect a bank's
financial condition.  Such factors may include interest rate risk exposure,
liquidity, funding and market risks, the quality and level of earnings,
concentration of credit risk, risks arising from nontraditional activities,
loan and investment quality, the effectiveness of loan and investment
policies, and management's ability to monitor and control financial operating
risks.

     Horizon Bank's management believes that, under the current regulations,
the Bank will continue to meet its minimum capital requirements in the
foreseeable future.  However, events beyond the control of the Bank, such as a
downturn in the economy in areas where the Bank has most of its loans, could
adversely affect future earnings and, consequently, the ability of the Bank to
meet its capital requirements.

     Federal Deposit Insurance Improvement Act ("FDICIA"). Horizon Bank has
surpassed the $500 million asset threshold, and as such, is required to be
compliant with the FDICIA originally enacted in 1991 and with enhanced
provisions adopted in 1993.  In general, FDICIA requires the Bank to conduct
an annual independent audit of its financial statements, appoint an
independent audit committee of outside directors, report on and assess
management's responsibilities for preparing financial statements, and
establish an internal control structure.

                                      17

<PAGE>



     An independent accountant must attest to and report on the assertions in
management's reports concerning these internal controls with the desired
outcome of efficient and effective operations; the safeguarding of assets;
reliable financial reporting and compliance with applicable laws and
regulations.

     The FDIC as the primary regulator of the Bank has outlined, in general,
the requirements for compliance with FDICIA, but does not provide specific
guidance on the internal control structure, documentation, or procedures to
test the Bank's effectiveness.  It is up to each bank to establish, document
and design procedures to evaluate and test the internal control structure over
financial reporting and compliance with designated laws and regulations that
minimally include loans to insiders and dividend restrictions.

     In brief, to ensure compliance, the Bank has established and coordinated
a management team that identifies and documents existing controls with
consideration given to the Bank's control environment, risk assessment,
control activities, information and communication systems, and monitoring
activities.  In addition, management establishes internal control procedures,
develops and selects criteria for evaluation, tests the effectiveness of
controls, and ensures that proper written documentation is in place.

     Under FDICIA, the Audit Committee has several responsibilities that
include but are not limited to overseeing the internal audit function;
conducting periodic meetings with management, the independent public
accountant, and the internal auditors; review of significant accounting
policies, and audit conclusions regarding significant accounting estimates;
review of the assessments prepared by management and independent auditor on
the adequacy of internal controls and the resolution of identified material
weaknesses and reportable conditions in internal controls; and the review of
compliance with laws and regulations.

     Federal Home Loan Bank System.  The FHLB of Seattle serves as a reserve
or central bank for the member institutions within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLBs. It makes loans (i.e., advances) to members in
accordance with policies and procedures established by the Federal Housing
Finance Board and the Board of Directors of the FHLB of Seattle.  As a member,
the Bank is required to purchase and hold stock in the FHLB of Seattle in an
amount equal to the greater of 1% of their aggregate unpaid home loan balances
at the beginning of the year or an amount equal to 5% of FHLB advances
outstanding.  As of March 31, 2003, Horizon Bank held stock in the FHLB of
Seattle in the amount of $6,638,500.  See "Business -- Savings Activities and
Other Sources of Funds -- Borrowings."

     Federal Reserve System. The Federal Reserve Board requires (under
"Regulation D") that all depository institutions, including savings banks,
maintain reserves on transaction accounts and non-personal time deposits.
These reserves may be in the form of cash or non-interest bearing deposits
with the regional Federal Reserve Bank.  NOW accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a savings bank.  Under
Regulation D, a bank must maintain reserves against net transaction accounts,
in the amount of 3% on amounts of $37.3 million or less, plus10% on amounts in
excess of $37.3 million.  In addition, a bank may designate and exempt $5.0
million of certain reservable liabilities from these reserve requirements.
The amounts and percentages are subject to adjustment by the Federal Reserve.
The reserve requirement on non-personal time deposits with original maturities
of less than 1.5 years is 0%.  As of March 31, 2003, the Bank was in
compliance with the Federal Reserve Bank's reserve requirements.

     Prompt Corrective Action.  Federal statutes establish a supervisory
framework based on five capital categories:  well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.  An institution's category depends upon where its capital
levels are in relation to relevant capital measure, which include a risk-based
capital measure, a leverage ratio capital measure, and certain other factors.
The federal banking agencies have adopted regulations that implement this
statutory framework.  Under these regulations, an institution is treated as
well capitalized if its ratio of total capital to risk-weighted assets is 10%
or more, its ratio of core capital to risk-weighted assets is 6% or more, its
ratio of core capital to adjusted total assets is 5% or more, and it is not
subject to any federal supervisory order or directive to meet a specific
capital level.  In order to be adequately capitalized, an institution must
have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based
capital ratio

                                      18

<PAGE>



of not less than 4%, and a leverage ratio of not less than 4%.  Any
institution which is neither well capitalized nor adequately capitalized will
be considered undercapitalized.

     Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized.  Failure
by the Bank to comply with applicable capital requirements would, if
unremedied, result in restrictions on its activities and lead to enforcement
actions, including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels.  Banking regulators will
take prompt corrective action with respect to depository institutions that do
not meet minimum capital requirements.  Additionally, approval of any
regulatory application filed for their review may be dependent on compliance
with capital requirements.

The Corporation
---------------

     General.  The Corporation, as the sole shareholder of the Bank, is a bank
holding company and is registered as such with the Federal Reserve.  Bank
holding companies are subject to comprehensive regulation by the Federal
Reserve under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and the regulations of the Federal Reserve.  As a bank holding company, the
Corporation is required to file with the Federal Reserve annual reports and
such additional information as the Federal Reserve may require and will be
subject to regular examinations by the Federal Reserve.  The Federal Reserve
also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries).  In general,
enforcement actions may be initiated for violations of law and regulations and
unsafe or unsound practices.

     Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the
"Act").   The Act modernized the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms and other financial service providers.
Generally, the Act:

     (a)  repealed the historical restrictions and eliminated many federal and
          state law barriers to affiliations among banks, securities firms,
          insurance companies and other financial service providers;

     (b)  provided a uniform framework for the functional regulation of the
          activities of banks, savings institutions and their holding
          companies;

     (c)  broadened the activities that may be conducted by national banks,
          banking subsidiaries of bank holding companies and their financial
          subsidiaries;

     (d)  provided an enhanced framework for protecting the privacy of
          consumer information;

     (e)  adopted a number of provisions related to the capitalization,
          membership, corporate governance and other measures designed to
          modernize the FHLB system;

     (f)  modified the laws governing the implementation of the Community
          Reinvestment Act; and

     (g)  addressed a variety of other legal and regulatory issues affecting
          day-to-day operations and long-term activities of financial
          institutions.

     The USA Patriot Act.  In response to the events of September 11th,
President George W. Bush signed into law the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act
gives the federal government new powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. By way
of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations

                                      19

<PAGE>



on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.

     Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:

     - Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-money
laundering compliance officer, (iii) ongoing employee training programs, and
(iv) an independent audit function to test the anti-money laundering program.

     - Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations that
provide for minimum standards with respect to customer identification at the
time new accounts are opened.

      - Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or correspondent
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) to
establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering.

     - Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a physical presence in
any country), and will be subject to certain recordkeeping obligations with
respect to correspondent accounts of foreign banks.

     - Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.

     During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and interim
regulations to implement the provisions of Sections 312 and 352 of the USA
PATRIOT Act.   Final rules were issued May 9, 2003 and are effective June 9,
2003.  Banks are expected to be fully compliant by October 1, 2003.  To date,
it has not been possible to predict the impact the USA PATRIOT Act and its
implementing regulations may have on the Corporation and the Bank.

     Sarbanes-Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law by President Bush on July 30, 2002
in response to public concerns regarding corporate accountability in
connection with the recent accounting scandals at Enron and WorldCom, among
others. The stated goals of the Sarbanes-Oxley Act are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws.

     The Sarbanes-Oxley Act is the most far-reaching U.S. securities
legislation enacted in some time. The Sarbanes-Oxley Act generally applies to
all companies, both U.S. and non-U.S., that file or are required to file
periodic reports with the Securities and Exchange Commission ("SEC"), under
the Securities Exchange Act of 1934 ("Exchange Act").

     The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.

                                      20

<PAGE>



     The Sarbanes-Oxley Act addresses, among other matters:

     .   audit committees;

     .   certification of financial statements by the chief executive officer
         and the chief financial officer;

     .   the forfeiture of bonuses or other incentive-based compensation and
         profits from the sale of an issuer's securities by directors and
         senior officers in the twelve month period following initial
         publication of any financial statements that later require
         restatement;

     .   a prohibition on insider trading during pension plan black out
         periods;

     .   disclosure of off-balance sheet transactions;

     .   a prohibition on personal loans to directors and officers;

     .   expedited filing requirements for Form 4s;

     .   disclosure of a code of ethics and filing a Form 8-K for a change or
         waiver of such code;

     .   "real time" filing of periodic reports

     .   the formation of a public accounting oversight board;

     .   auditor independence; and

     .   various increased criminal penalties for violations of securities
         laws.

     The Sarbanes-Oxley Act contains provisions which became effective upon
enactment on July 30, 2002 and provisions which will become effective from
within 30 days to one year from enactment. The SEC has been delegated the task
of enacting rules to implement various provisions with respect to, among other
matters, disclosure in periodic filings pursuant to the Exchange Act.

     Acquisitions.   Under the BHCA, a bank holding company must obtain
Federal Reserve approval before: (1) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of
such shares (unless it already owns or controls the majority of such shares);
(2) acquiring all or substantially all of the assets of another bank or bank
holding company; or (3) merging or consolidating with another bank holding
company.

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries.  The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks.  The list of activities permitted by
the Federal Reserve includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or
factoring company, performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and United States Savings Bonds; real estate and personal
property appraising; providing tax planning and preparation services; and,
subject to certain limitations, providing securities brokerage services for
customers.

     Dividends.  The Federal Reserve's policy statement on the payment of cash
dividends by bank holding companies expresses the Federal Reserve's view that
a bank holding company should pay cash dividends only to the

                                      21

<PAGE>



extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent
with the company's capital needs, asset quality and overall financial
condition.  The Federal Reserve also indicated that it would be inappropriate
for a company experiencing serious financial problems to borrow funds to pay
dividends.

     Capital Requirements.  The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the Office of the Comptroller of the
Currency's regulations.  Under the Federal Reserve Board's capital guidelines,
at March 31, 2003, the Corporation's levels of consolidated regulatory capital
exceed the Federal Reserve's minimum requirements, as follows:

                                              Amount      Percent
                                              ------      -------
                                             (Dollars in thousands)

     Tier 1 Capital                          $ 99,608      12.46%
     Minimum Tier 1 (leverage) requirement     31,979       4.00
                                             --------      -----
     Excess                                  $ 67,629       8.46%
                                             ========      =====

     Risk-based capital                      $109,357      18.75%
     Minimum risk-based capital requirement    46,652       8.00
                                             --------      -----
     Excess                                  $ 62,705      10.75%
                                             ========      =====

     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 Company has completed three of four stock repurchase plans.  At its
October 22, 2002 meeting, the Board of Directors authorized its fourth
repurchase plan for up to 10% (approximately 1,065,000, as restated) of the
Corporation's outstanding common stock over a 12 month period.  During the
fiscal year ended March 31, 2003, the Corporation repurchased 195,700 shares
of its Common Stock under this plan. Repurchases in fiscal 2003 under all
plans, totaled 410,350 shares of Common Stock, compared to the repurchase of
327,952 shares of Common Stock during the prior year.   As of June 6, 2003,
the Corporation has repurchased a total of 230,900 shares under the current
plan.

                                TAXATION

Federal Taxation
----------------

     General.  The Corporation and the Bank report their consolidated income
on a fiscal year basis using the accrual method of accounting and are subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below.  The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Corporation.  Reference is made to Note 12 of
the Notes to the Consolidated Financial Statements contained in the
Corporation's Proxy Statement for additional information concerning the income
taxes payable by the Bank.

     Tax Bad Debt Reserves. Historically, savings institutions such as the
Bank, which met certain definitional tests primarily related to their assets
and the nature of their businesses, were permitted to establish a reserve for
bad debts and to make annual additions to the reserve.  These additions may,
within specified formula limits, have been deducted in arriving at the Bank's
taxable income.  For purposes of computing the deductible addition to its bad
debt reserve, the

                                      22

<PAGE>



Bank's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by interests in residential real property) and
all other loans ("non-qualifying loans").  The following formulas were used to
compute the bad debt deduction with respect to qualifying real property loans:
(i) actual loss experience or (ii) a percentage equal to 8% of taxable income.
The deduction with respect to non-qualifying loans was computed under the
experience method.  Reasonable additions to the reserve for losses on
non-qualifying loans were based upon actual loss experience and would reduce
the current year's addition to the reserve for losses on qualifying real
property loans, unless that addition was also determined under the experience
method.  The sum of the additions to each reserve for each year was the Bank's
annual bad debt deduction.

     The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996."  The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all financial institutions for tax years beginning
after December 31, 1995.  These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988).  The Bank has
previously recorded a deferred tax liability equal to the bad debt recapture
and as such the new rules will have no effect on the net income or federal
income tax expense.  For taxable years beginning after December 31, 1995, the
Bank's bad debt deduction will be determined under the experience method using
a formula based on actual bad debt experience over a period of years or, if
the Bank is a "large" association (assets in excess of $500 million) on the
basis of net charge-offs during the taxable year.  The new rules allow an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation.  For this purpose, only
home purchase or home improvement loans are included and the institution can
elect to have the tax years with the highest and lowest lending activity
removed from the average calculation.  If an institution is permitted to
postpone the reserve recapture, it must begin its six year recapture no later
than the 1998 tax year.  The unrecaptured base year reserves will not be
subject to recapture as long as the institution continues to carry on the
business of banking.  In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provisions of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.

     Distributions.  If a stock institution distributes amounts to
stockholders and the distribution is treated as being from its accumulated bad
debt reserves, the distribution will cause the institution to have additional
taxable income.  A distribution to stockholder is deemed to have been made
from accumulated bad debt reserves to the extent that (i) the reserves exceed
the amount that would have been accumulated on the basis of actual loss
experience, and (ii) the distribution is a "non-dividend distribution."  A
distribution in respect of stock is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is redemption of shares, (ii) it
is pursuant to a liquidation or partial liquidation of the institution, or
(iii) in the case of current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's current
and post-1951 accumulated earnings and profits.  The amount of additional
taxable income created by a non-dividend distribution is an amount that, when
reduced by tax attributable to it, is equal to the amount of the distribution.

     Minimum Tax.  In addition to regular corporate income tax, corporations
are subject to an alternative minimum tax which generally is equal to 20% of
alternative minimum taxable income (taxable income, increased by tax
preference items and adjusted for certain regular tax items).  The preference
items which are generally applicable include an amount equal to 75% of the
amount by which a financial institution's adjusted current earnings (generally
alternative minimum taxable income computed without regard to this preference
and prior to reduction for net operating losses) exceeds its alternative
minimum taxable income without regard to this preference and the excess of the
institution's bad debt deduction over the amount deductible under the
experience method, as discussed below.  Alternative minimum tax paid can be
credited against regular tax due in later years.

     Audits.  The Bank has not been audited by the IRS during the past five
years.

                                      23

<PAGE>



Washington Taxation
-------------------

     The Bank is subject to a business and occupation tax which is imposed
under Washington law at the rate of 1.50% of gross receipts; however, interest
received on loans secured by mortgages or deeds of trust on residential
properties is not subject to such tax.  The Bank's  business and occupation
tax returns were audited in November 1995.

Item 2.  Properties
-------------------

     The following table sets forth the location of the Bank's offices, as
well as certain information relating to these offices.

                                           Net Book
                               Year      Value as of     Square    Leased/
                              Opened    March 31, 2003    Feet      Owned
                              ------    --------------    ----      -----

Bellingham Main Office.....    1971       $1,171,474     19,179     Owned
 1500 Cornwall Avenue
 Bellingham, WA 98225

Bellingham/Meridian........    1987          702,389      4,650     Owned
 4110 Meridian
 Bellingham, WA 98226

Ferndale Office............    1976          291,917      3,692     Owned
 Third and Main
 Ferndale, WA 98248

Lynden Office..............    1981          494,595      3,702     Owned
 Third and Grover
 Lynden, WA 98264

Blaine Office..............    1976          476,478      3,610     Owned
 Fourth & "H" Streets
 Blaine, WA 98230

Mount Vernon Office........    1976          247,232      3,275     Owned
 1503 Riverside Dr.
 Mount Vernon, WA 98273

Anacortes Office...........    1987          753,680      3,650     Owned
 1218 Commercial Avenue

 Anacortes, WA 98221

Snohomish Office...........    1987          128,967      1,388     Owned
 620 2nd Street
 Snohomish, WA 98290

                   (table continued on following page)

                                      24

<PAGE>



                                           Net Book
                               Year      Value as of     Square    Leased/
                              Opened    March 31, 2003    Feet      Owned
                              ------    --------------    ----      -----

Everett Office.............    1991           31,444      1,972     Leased
 909 S.E. Everett Mall Way
 #E-500
 Everett, WA 98208

Burlington Office..........    1994        1,084,983      3,980     Owned
 1020 S. Burlington Blvd
 Burlington, WA  98232

Edmonds Office.............    1994        2,153,615     15,265     Owned
 130 Fifth Avenue South
 Edmonds, WA  98020

Murphy's Corner Office.....    2000        1,750,564      3,720     Owned
 12830 Bothell Everett Hwy.
 Everett, WA 98208

Barkley Office.............    1999        3,184,166     14,691     Owned
 2122 Barkley Blvd.
 Bellingham, WA 98228

Holly Street Office........    1999          456,431      4,000     Owned
 211 E. Holly Street
 Bellingham, WA 98227

Alabama Office.............    1999          702,035      4,500     Owned
 802 Alabama Street
 Bellingham, WA 98228

Marysville (land only).....      --          635,737         --     Owned

Lynnwood Office (1)........    2003        1,668,547      4,230     Owned
 19405 44th Avenue W.
 Lynnwood, WA 98036

-----------
(1) Opened in March 2003.

     At March 31, 2003, the aggregate book value of the Corporation's premises
and equipment was $15,934,254.

Item 3.  Legal Proceedings
--------------------------

     Neither the Corporation nor the Bank is engaged in any legal proceedings
of a material nature at the present time.  From time to time it is a party to
legal proceedings wherein it enforces its security interest in loans made by
it.

                                      25

<PAGE>



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

     Not applicable.

                                PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------

     Horizon Financial Corp.'s common stock is traded on The Nasdaq Stock
Market under the symbol HRZB.  The common stock began trading on the Nasdaq
Stock Market at the time of Horizon's conversion to stock form in August 1986.
The following table presents the high and low prices as reported by the Nasdaq
Stock Market and dividends paid for the last two fiscal years.  These prices
represent quotations by the dealers and do not necessarily represent actual
transactions, and do not include retail markups, markdowns or commissions.
The Corporation has approximately 4,900 stockholders.

                2003 Fiscal Year
                Quarter              High        Low      Dividend
                -----------------   ------      ------    --------

                Fourth              $15.70      $12.11     $0.115
                Third                12.48       10.21      0.115
                Second               12.80       10.00      0.110
                First                13.28        9.88      0.110

                2002 Fiscal Year
                Quarter              High        Low      Dividend
                -----------------   ------      ------    --------

                Fourth              $10.40       $8.96     $0.096
                Third                10.40        8.70      0.096
                Second               10.00        7.60      0.096
                First                 9.40        7.13      0.096

Dividend Policy
---------------

     Horizon Financial Corp. historically has paid cash dividends on its
common stock.  The Corporation must adhere to certain regulatory requirements
governing the distribution of dividends, and there can be no assurance that
the Corporation will continue to declare cash dividends in the future.

Item 6.  Selected Financial Data
--------------------------------
    The following table sets forth certain information concerning the
financial position of the Bank at and for the dates indicated.

<TABLE>
                                                               March 31,
                                     -------------------------------------------------------------
                                        2003        2002         2001         2000         1999
                                        ----        ----         ----         ----         ----
                                                            (In thousands)

                                  <c>          <c>          <c>          <c>          <c>
Financial Condition Data:
------------------------
Total Assets......................   $819,872     $772,063     $729,736     $713,914     $668,116
Loans Outstanding.................    582,269      568,303      597,382      589,584      533,649
Cash and Investment Securities....    197,296      171,346      106,117       99,375      115,194
Deposits..........................    646,722      628,782      595,914      564,327      537,390
Borrowings........................     53,763       29,121       22,938       39,853       22,718
Stockholders' Equity..............    106,244      100,600       97,909       95,935       96,441

</TABLE>

                                      26

<PAGE>



<TABLE>

                                                        Year Ended March 31,
                                       -------------------------------------------------------------
                                        2003        2002         2001         2000         1999(1)
                                        ----        ----         ----         ----         -------
                                                           (In thousands)

                                   <c>        <c>           <c>          <c>          <c>
Operating Data:
--------------
Interest Income...................    $50,229     $ 53,091     $ 55,837      $49,947      $48,119
Interest Expense..................    (19,461)     (26,541)     (32,239)     (26,257)     (25,267)
Net Interest Income...............     30,768       26,550       23,598       23,690       22,852
Other Income......................      7,408        4,614        2,951        2,851        3,175
Non-interest Expense..............    (17,346)     (14,891)     (13,756)     (13,243)     (11,357)
Provision for Loan Losses.........     (2,740)      (1,089)        (320)        (437)        (484)
Income (Loss) Before Taxes........     18,090       15,184       12,473       12,861       14,186
Federal Income Tax................     (5,950)      (5,130)      (4,202)      (4,180)      (4,844)
Net Income........................    $12,140     $ 10,054     $  8,271      $ 8,681      $ 9,342

Per Common Share:(2)
  Fully-diluted earnings..........      $1.12        $0.91        $0.72        $0.70        $0.75
  Dividends.......................       0.45         0.38         0.34         0.33         0.30(3)
  Equity..........................      10.07         9.35         8.84         8.06         7.90
  Weighted average shares
    outstanding................... 10,674,506   10,921,233   11,441,342   12,228,884   12,175,479
----------
(1)   Prior year numbers are restated to reflect the merger of Bellingham Bancorporation effective June 19,
      1999.
(2)   Restated for 15% stock dividend effective May 11, 2001 and 25% stock split effective July 23, 2002.
(3)   Prior year numbers based on shares outstanding prior to merger for each respective year.

</TABLE>



Key Operating Ratios:
--------------------

     The table below sets forth certain performance ratios of the Bank for the
periods indicated.  These ratios are calculated based on month end balances.

                                                 At and for the
                                                Year Ended March 31,
                                            ----------------------------
                                            2003        2002        2001
                                            ----        ----        ----
Return on average assets (net income
  divided by average total assets)........  1.52%       1.35%       1.14%

Return on average equity (net income
  divided by average equity).............. 11.69       10.14        8.58

Dividend payout ratio (dividends declared
  per share divided by fully-diluted
  earnings per share...................... 40.18       42.11       46.38

Equity to assets ratio (average equity
  divided by average total assets)........ 13.02       13.29       13.43

Interest rate spread (difference between
  average yield on interest-earning
  assets and average cost of interest
  bearing liabilities)....................  3.96        3.36        2.89

Net yield on earning assets (net interest
  income as a percentage of average
  interest earning assets)................  4.20        3.78        3.42

Efficiency ratio.......................... 45.44       47.78       51.82

                                      27

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
         Results of Operations
         ---------------------

     Information required by this item is incorporated herein by reference to
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Corporation's Proxy Statement.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------

     Information required by this item is incorporated herein by reference to
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative
Disclosures About Market Risk" contained in the Corporation's Proxy Statement.

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

     The financial statements contained in the Proxy Statement which are
listed under Item 15 herein, are incorporated herein by reference.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
         Financial Disclosure
         --------------------

     Not applicable.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors" and "Compliance with Section 16(a) of the Exchange Act"
in the Registrant's Proxy Statement is incorporated herein by reference.

     The executive officers of the Corporation and the Bank are as follows:

Name                  Age                       Position
-------------------  ----  ---------------------------------------------------

V. Lawrence Evans     56   Chairman of the Board, Chief Executive Officer and
                           President of the Corporation; and Chairman of the
                           Board and Chief Executive Officer of the Bank (1)

Dennis C. Joines      53   President, Chief Operating Officer and Director of
                           the Bank; Executive Vice President and Director of
                           the Corporation

Richard P. Jacobson   40   Vice President and Secretary of the Corporation and
                           Executive Vice President and Secretary of the Bank

A.R. (Gus) Ayala      53   Senior Vice President of the Bank

Tammy D. Barnett      43   Senior Vice President of the Bank

Karla C. Lewis        56   Senior Vice President of the Bank

Steve L. Hoekstra     52   Executive Vice President of the Bank

Kelli J. Holz         34   Vice President of the Corporation and the Bank

                          (footnote on following page)

                                      28

<PAGE>



-------------
(1)   Effective April 23, 2002, Dennis C. Joines, was named President and
      Chief Operating Officer of Horizon Bank.  V. Lawrence Evans, who has
      served as President of Horizon Bank since 1990 continues to serve
      as Chairman of the Board and Chief Executive Officer of Horizon Bank and
      Chairman of the Board, President and Chief Executive Officer of Horizon
      Financial Corp.

     The following is a description of the principal occupation and employment
of the executive officers of the Corporation and the Bank during at least the
past five years:

     V. LAWRENCE EVANS joined the Bank in 1972 and served as the Bank's
Executive Vice President from 1983 to 1990.  Mr. Evans served as President of
the Bank from May 14, 1990 to April 23, 2002.  He has served as Chief
Executive Officer of the Bank since March 26, 1991 and as Chairman of the
Bank's Board of Directors since July 1997.  Mr. Evans also serves as Chairman
of the Board, President and Chief Executive Officer of the Corporation.

     DENNIS C. JOINES became President and Chief Operating Officer of the Bank
on April 23, 2002 and a Director of the Corporation and the Bank on April 23,
2002.  He joined the Bank following an extensive career in the Pacific
Northwest banking industry for over 30 years.  Most recently, Mr. Joines was
Senior Vice President/National Small Business and SBA Manager for Washington
Mutual Bank from 2001 to 2002.  Prior to that time, he served in a variety of
key roles at KeyBank from 1993 to 2001.

     RICHARD P. JACOBSON has worked for the Bank for 16 years and was
appointed Vice President/Finance and Corporate Secretary in December 1994.  In
March 1998, Mr. Jacobson was appointed Senior Vice President of the Bank.  In
March 2000, he was appointed Executive Vice President of the Bank.

     A.R. (GUS) AYALA joined the Bank pursuant to the merger of Bellingham
Bancorporation effective June 19, 1999.  He served as Chief Financial Officer
for the Bank of Bellingham from September 1997 until completion of the merger.
Previously, he was Senior Vice President with a commercial bank in Lompoc,
California.  He is currently Senior Vice President, and Operations Manager for
the Bank.

     TAMMY BARNETT joined the Bank in 1994.  From 1994 to March 2003, she was
the Branch Manager of the Burlington office.  She was appointed Vice President
in March 2002.  In March 2003, she was appointed Senior Vice President, and is
currently the Bank's Mortgage Loan Operations Manager.

     KARLA C. LEWIS joined Horizon Bank in 1973.  From 1983 to December 1994,
she was the Manager of the Loan Servicing Department.  She was appointed Vice
President in June 1987 and is currently the Bank's Chief Lending Officer.  In
March 1998, she was appointed Senior Vice President of the Bank.

     KELLI J. HOLZ, CPA, joined the Bank in 1988.  From 1991 to 1998 she was
the Manager of the Internal Audit Department.  In March 1998, she was
appointed Vice President and is currently the Controller of the Bank.

     STEVE L. HOEKSTRA joined the Bank in June, 2002.  Mr. Hoekstra has 25
years of experience in the local commercial banking industry. Most recently,
he led the Bellingham commercial and retail team for Frontier Bank.  Prior to
that, Mr. Hoekstra was employed for 22 years by SeaFirst/Bank of America,
where his titles included Commercial Credit Administrator, Sales Team Leader,
Equipment Financing and Leasing Specialist and Dealer Banking.

Item 11.  Executive Compensation
--------------------------------

     Information regarding management compensation and transactions with
management and others is incorporated by reference to the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement.

                                      29

<PAGE>



Item 12.  Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

     (a)  Security Ownership of Certain Beneficial Owners

     Information required by this item is incorporated herein by reference to
     the section captioned "Voting Securities and Principal Holders Thereof"
     in the Proxy Statement.

     (b)  Security Ownership of Management

     Information required by this item is incorporated herein by reference to
     the section captioned "Voting Securities and Principal Holders Thereof"
     in the Proxy Statement.

     Equity Compensation Plan Information. The following table summarizes
share and exercise price information about the Corporation's equity
compensation plans as of March 31, 2003.


<PAGE>
<TABLE>

                                                                            (c)
                                                                    Number of securities
                                      (a)             (b)           remaining available
                           Number of securities  Weighted-average   for future issuance
                            to be issued upon     exercise price        under equity
                               exercise of        of outstanding     compensation plans
                           outstanding options,  options, warrants  (excluding securities
Plan category              warrants and rights      and rights      reflected in column (a))
-------------------------  -------------------   -----------------  ------------------------


                               <c>                <c>                  <c>
Equity compensation
plans approved by
security holders:
  Option plan.............        455,408           $8.00                   8,548

Equity compensation
plans not approved by
security holders..........             --             --                      --

</TABLE>



     (c)  Changes in Control

     The Corporation is not aware of any arrangements, including any pledge by
     any person of securities of the Corporation, the operation of which may
     at a subsequent date result in a change in control of the Corporation.

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

     The information contained under the section captioned "Voting Securities
and Principal Holders Thereof" in the Proxy Statement is incorporated herein
by reference.

Item 14.  Controls and Procedures
---------------------------------

     (a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Corporation's disclosure controls and procedures (as defined in Section
13(a)-14(c) 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 within the 90-day period preceding the
filing date of this annual report.  The Corporation's Chief Executive Officer
and Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures as currently in effect are 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

                                      30

<PAGE>



a timely manner, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.

     (b) Changes in Internal Controls:  In the year ended March 31, 2003, the
Corporation did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.

Item 15.  Principal Accountant Fees and Services
------------------------------------------------

     The information contained under the section captioned "Auditors" in the
Proxy Statement is incorporated herein by reference.

                               PART IV

Item 16.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------

     (a)  (1)  Financial Statements.
               --------------------

               Independent Auditor's Report*
               Consolidated Statement of Financial Position, March 31, 2003
                 and 2002*
               Consolidated Statement of Income for the years ended  March 31,
                 2003, 2002 and 2001*
               Consolidated Statement of Stockholders' Equity  for the years
                 ended March 31,2003, 2002 and 2001*
               Consolidated Statement of Cash Flows for the years ended March
                 31, 2003, 2002 and 2001*

               Notes to Consolidated Financial Statements*

-------------
*     Contained in the Corporation's Proxy Statement and incorporated herein
      by reference.

          (2) All required financial statement schedules  are included in the
              Notes to Consolidated Financial Statements contained in the
              Corporation's Proxy Statement.

     (b) No current reports on Form 8-K were filed by the Corporation during
         the three months ended March 31, 2003.

     (c) Exhibits
         --------

         (3.1)     Articles of Incorporation of Horizon Financial, Corp.
                     (incorporated by reference to Exhibit 3.1 to the
                     Registrant's Current Report on Form 8-K dated October 13,
                     1995)
         (3.2)     Bylaws of Horizon Financial Corp. (incorporated by
                     reference to Exhibit 3.2 to the Registrant's Current
                     Report on Form 8-K dated October 13, 1995)
         (10.1)    Amended and Restated Employment Agreement with V. Lawrence
                     Evans (incorporated by reference to the Registrant's
                     Annual Report on Form 10-K for the year ended March
                     31, 1996)
         (10.2)    Deferred Compensation Plan (incorporated by reference to
                     the Registrant's Annual Report on Form 10-K for the year
                     ended March 31, 1996)
         (10.3)    1986 Stock Option and Incentive Plan (incorporated by
                     reference to Exhibit 99.1 to the Registrant's
                     Registration Statement on Form S-8 (File No. 33-99780))
         (10.4)    1995 Stock Option Plan (incorporated by reference to
                     Exhibit 99.2 to the Registrant's Registration Statement
                     on Form S-8 (File No. 33-99780))

         (10.5)    Bank of Bellingham 1993 Employee Stock Option Plan
                     (incorporated by reference to Exhibit 99 to the
                     Registrant's Registration Statement on Form S-8 (File No.
                     33-88571))
         (10.6)    Severance Agreement with Dennis C. Joines (incorporated by
                     reference to the Registrant's Annual Report on Form 10-K
                     for the year ended March 31, 2002)
         (10.7)    Severance Agreement with Richard P. Jacobson (incorporated
                     by reference to the Registrant's Quarterly Report on Form
                     10-Q for the quarter ended June 30, 2002)

                                      31

<PAGE>



         (10.8)    Severance Agreement with Steve Hoekstra (incorporated by
                     reference to the Registrant's Current Report on Form 8-K
                     dated June 20, 2002)
         (21)      Subsidiaries of the Registrant
         (23)      Consent of Independent Auditors
         (99)      Certification Pursuant to Section 906 of the Sarbanes-Oxley
                     Act of 2002

                                      32

<PAGE>



                                 SIGNATURES

     Pursuant to the requirements of Section 13 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.


                               SIGNATURES

     Pursuant to the requirements of Section 13 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.

 Date:  June 19, 2003                       By: /s/ V. Lawrence Evans
                                            ----------------------------
                                            V. Lawrence Evans
                                            Chairman of the Board, Chief
                                            Executive Officer, and President
                                            (Duly Authorized Representative)

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates  indicated.


By: /s/V. Lawrence Evans                    By: /s/Robert C. Diehl
    ---------------------------------           -----------------------------
    V. Lawrence Evans                           Robert C. Diehl
    Chairman of the Board, Chief                Director
    Executive Officer, and President

    Date:  June 19, 2003                        Date:  June 19, 2003

By: /s/Richard P. Jacobson                   By: /s/Fred R. Miller
    --------------------------------            -----------------------------
    Richard P. Jacobson                         Fred R. Miller
    Principal Financial Officer                 Director

    Date:  June 19, 2003                        Date:  June 19, 2003


By: /s/Dennis C. Joines                     By: /s/ James A. Strengholt
    --------------------------------            -----------------------------
    Dennis C. Joines                            James A. Strengholt
    President, Chief Operating                  Director
    Officer and Director of Horizon
    Bank, and Executive Vice
    President and Director of
    Horizon Financial Corp.

    Date:  June 19, 2003                        Date:  June 19, 2003


By: /s/Kelli J. Holz                        By: /s/ Robert C. Tauscher
    --------------------------------            -----------------------------
    Kelli J. Holz                               Robert C. Tauscher
    Principal Accounting Officer                Director

    Date:  June 19, 2003                        Date:  June 19, 2003

                                       33

<PAGE>




By: /s/ Richard R. Haggen                   By: /s/Gary E. Goodman
    -------------------------                   -------------------------
    Richard R. Haggen                           Gary E. Goodman
    Director                                    Director

    Date:  June 19, 2003                        Date:  June 19, 2003

                                      34

<PAGE>




                                CERTIFICATIONS

                          Certification Required
     by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934

I, V. Lawrence Evans, certify that:

    (1) I have reviewed this annual report on Form 10-K of Horizon Financial
        Corp.;

    (2) Based on my knowledge, this annual 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 annual report;

    (3) Based on my knowledge, the financial statements, and other financial
        information included in this annual 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 annual report;

    (4) The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
        and we have:

        a) designed such disclosure controls and procedures 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 annual
           report is being prepared;

        b) evaluated the effectiveness of the registrant's disclosure controls
           and procedures as of a date within 90 days prior to the filing date
           of this annual report (the "Evaluation Date"); and

        c) presented in this annual report our conclusions about the
           effectiveness of the disclosure controls and procedures based on
           our evaluation as of the Evaluation Date;

    (5) The registrant's other certifying officers and I have disclosed, based
        on our most recent evaluation, to the registrant's auditors and the
        audit committee of registrant's board of directors (or persons
        performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal
           controls which could adversely affect the registrant's ability to
           record, process, summarize and report financial data and have
           identified for the registrant's auditors any material weaknesses in
           internal controls; and

        b) any fraud, whether or not material, that involves management or
           other employees who have a significant role in the registrant's
           internal controls; and

    (6) The registrant's other certifying officers and I have indicated in
        this annual report whether or not there were significant changes in
        internal controls or in other factors that could significantly affect
        internal controls subsequent to the date of our most recent
        evaluation, including any corrective actions with regard to
        significant deficiencies and material weaknesses.

Date: June 19, 2003
                                       /s/ V. Lawrence Evans
                                       ------------------------------
                                       V. Lawrence Evans
                                       Chief Executive Officer and President

                                      35

<PAGE>




                          Certification Required
     by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934

I, Richard P. Jacobson, certify that:

    (1) I have reviewed this annual report on Form 10-K of Horizon Financial
        Corp.;

    (2) Based on my knowledge, this annual 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 annual report;

    (3) Based on my knowledge, the financial statements, and other financial
        information included in this annual 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 annual report;

    (4) The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
        and we have:

        a) designed such disclosure controls and procedures 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 annual
           report is being prepared;

        b) evaluated the effectiveness of the registrant's disclosure controls
           and procedures as of a date within 90 days prior to the filing date
           of this annual report (the "Evaluation Date"); and

        c) presented in this annual report our conclusions about the
           effectiveness of the disclosure controls and procedures based on
           our evaluation as of the Evaluation Date;

    (5) The registrant's other certifying officers and I have disclosed, based
        on our most recent evaluation, to the registrant's auditors and the
        audit committee of registrant's board of directors (or persons
        performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal
           controls which could adversely affect the registrant's ability to
           record, process, summarize and report financial data and have
           identified for the registrant's auditors any material weaknesses in
           internal controls; and

        b) any fraud, whether or not material, that involves management or
           other employees who have a significant role in the registrant's
           internal controls; and

    (6) The registrant's other certifying officers and I have indicated in
        this annual report whether or not there were significant changes in
        internal controls or in other factors that could significantly affect
        internal controls subsequent to the date of our most recent
        evaluation, including any corrective actions with regard to
        significant deficiencies and material weaknesses.

Date: June 19, 2003

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

                                      36

<PAGE>



                                 Exhibit 21

                       Subsidiaries of the Registrant

Parent
------

Horizon Financial Corp.
                                                        Jurisdiction
                                     Percentage         or State of
Subsidiaries (a)                    of Ownership       Incorporation
----------------                    ------------       -------------

Horizon Bank                            100%             Washington

Westward Financial
  Services, Inc. (b)                    100%             Washington

--------------
(a)  The operation of the Corporation's wholly owned subsidiaries are
     included in the Consolidated Financial Statements contained in the
     Item 8 of this Form 10-K.

(b)  Wholly-owned subsidiary of Horizon Bank.

<PAGE>



                                 Exhibit 23

                        Consent of Independent Auditors

<PAGE>

                         CONSENT OF INDEPENDENT AUDITOR'S

The Board of Directors
Horizon Financial Corp.


We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-99780) of Horizon Financial Corp. pertaining to the 1986
Stock Option and Incentive Plan, and the 1995 Stock Option Plan; and the
Registration Statement on Form S-8 (No. 333-88571) pertaining to the Bank of
Bellingham 1993 Employee Stock Option Plan; of our report dated April 25,
2003, appearing in the 2003 proxy statement of Horizon Financial Corp., which
is incorporated by reference in Horizon Financial Corp.'s Annual Report on
Form 10-K for the year ended March 31, 2003.


/s/Moss-Adams LLP


Bellingham, Washington
June 17, 2003

<PAGE>




                                Exhibit 99

   Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

<PAGE>



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


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

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

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

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

Dated: June 19, 2003

A signed original of this written statement required by Section 906 has been
provided to Horizon Financial Corp. and will be retained by Horizon Financial
Corp. and furnished to the staff of the Securities and Exchange Commission or
its staff upon request.

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