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, 2002  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
                                                   ---      ---

     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 5,
2002, was $127,228,221 (8,567,557 shares at $14.85 per share).  It is assumed
for purposes of this calculation that none of the registrant's officers,
directors and 5% stockholders are affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

     1.   Portions of the Registrant's Proxy Statement for the 2002 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, 2002,
the Corporation had total assets of $772.1 million, total deposits of $628.8
million and total equity of $100.6 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 15 full-service office
facilities, located in Whatcom, Skagit and Snohomish counties in Northwest
Washington.  The acquisition of Bellingham Bancorporation increased Horizon
Financial's and Horizon Bank's presence in Whatcom County.  During fiscal
2000, the Bank opened an additional office in Whatcom County, located in the
Barkley Village area of Bellingham, in the northeast portion of the city.  In
addition to serving the growing population in this area, this office serves as
an operation center to support additional growth for the Corporation.  The
Bank also completed construction of a new office building at Murphy's Corner
near Mill Creek, which replaced the Bank's leased location in that area.
During fiscal 2000, the Bank purchased a bank site in Marysville, which will
provide additional growth opportunities.  In fiscal 2002, the Bank acquired a
bank site in Lynnwood, Washington.  The Bank is currently working on
remodeling and upgrading this building, and anticipates opening for business
in the fall of 2002.

     At its October 24, 2000 meeting, the Board of Directors authorized a new
repurchase plan for up to 10% (approximately 897,000, as restated) of the
Corporation's outstanding common stock over a 24 month period.  During the
fiscal year ended March 31, 2002, the Corporation repurchased 327,952 shares
of its Common Stock, compared to the repurchase of 683,790 shares of Common
Stock during the prior year.  The Corporation had repurchased an aggregate of
443,527 shares under this plan as of March 31, 2002.

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

     Management.  On 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 will continue  to serve as Chairman of
the Board and Chief Executive Officer of Horizon Bank and President and Chief
Executive Officer of Horizon Financial.  For additional information regarding
Mr. Joines, see Part III, Item 10, Directors and Executive Officers of the
Registrant, contained in this Form 10-K.

     Recently Issued Accounting Standards.  In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 141 entitled Business Combinations and SFAS No. 142
entitled Goodwill and Other Intangible Assets.  These statements address how
intangible assets that are acquired individually, with a group of other assets
or in connection with a business combination, should be accounted for in
financial statements upon and subsequent to their acquisition.  These
standards apply to all business combinations

                                      1

<PAGE>



initiated after June 30, 2001 and are effective for fiscal years beginning
after December 15, 2001.  The Corporation has evaluated the impact that these
statements might have on its financial position and results of operations, and
does not expect such impact to be material.

     In June 2001, the FASB issued SFAS No. 143 entitled Accounting for Asset
Retirement Obligations.  This statement establishes the accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.  This standard is
effective for fiscal years beginning after June 15, 2002.  The Corporation is
currently evaluating the impact that this statement will have on their
financial position and results of operations, however they do not expect such
impact to be material.

     In August 2001, the FASB issued SFAS No. 144 entitled Accounting for the
Impairment or Disposal of Long-Lived Assets.  This statement supercedes SFAS
No. 121 and establishes financial accounting and reporting requirements for
the impairment and disposal of long-lived assets.  This standard is effective
for fiscal years beginning after December 15, 2001.  The Corporation is
currently evaluating the impact that this statement will have on their
financial position and results of operations, however they do not expect such
impact to be material.

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

     General.  The Bank's loan portfolio totaled $568,303,481 at March 31,
2002, representing approximately 73.61% of its total assets.  On that date,
42.45% of total outstanding loans consisted of loans secured by mortgages on
single family residential properties, 5.76% of the loans consisted of loans
secured by two-to- four unit residential properties, 4.69% of total
outstanding loans consisted of loans secured by mortgages on over four unit
residential properties, and 43.15% 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 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,
                              -----------------------------------------------------------------------------
                                   2002             2001           2000            1999            1998
                              -------------   -------------   -------------   -------------   -------------

                           <c>             <c>             <c>             <c>             <c>
Type of Loan:
First mortgage loans:
  One-to-four family......... $ 493,097,739   $ 619,394,856   $ 606,702,881   $ 564,394,944   $ 486,107,297
  One-to-four family
    construction.............    29,958,286      26,715,987      25,911,941      23,817,577      15,676,088
  Participations sold........  (228,874,332)   (246,582,822)   (176,537,497)   (163,526,986)   (112,251,375)
                              -------------   -------------   -------------   -------------   -------------
     Subtotal................   294,181,693     399,528,021     456,077,325     424,685,535     389,532,010

Commercial construction/land
  development................    55,746,760      30,364,368      18,716,744       2,505,484      14,381,275
Residential commercial
  real estate................    28,603,971      24,186,903      21,999,357      18,158,927      17,793,806
Nonresidential commercial
  real estate................   169,696,803     139,232,200      88,322,611      74,120,509      46,148,886
Commercial loans.............    37,844,119      20,221,122      14,472,300      19,293,804      11,936,000
Home equity secured..........    18,873,309      19,834,618      16,952,862      13,499,198      16,701,470
Other consumer loans.........     5,263,284       2,530,851       4,829,230       5,216,800       5,812,765
                              -------------   -------------   -------------   -------------   -------------
     Subtotal................   610,209,939     635,898,083     621,370,429     557,480,257     502,306,212

Less:
  Deferred loan fees.........    (5,612,704)     (6,745,573)     (7,397,782)     (7,203,886)     (6,924,744)
  Loan loss reserve..........    (5,887,482)     (4,976,670)     (4,757,152)     (4,463,305)     (4,085,203)
  Loans in process...........   (30,406,272)    (26,793,487)    (19,631,956)    (12,163,897)    (12,635,603)
                              -------------   -------------   -------------   -------------   -------------
                              $ 568,303,481   $ 597,382,353   $ 589,583,539   $ 533,649,169   $ 478,660,662
                              =============   =============   =============   =============   =============
</TABLE>





     Loan Maturity.  The following table sets forth certain information at
March 31, 2002 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, 2002  March 31, 2002  March 31, 2002    Total
                     --------------  --------------  --------------    -----
                                            (In thousands)

Commercial, financial
  and agricultural...   $ 57,805       $ 23,281         $ 80,041     $161,127
Real estate
  construction.......         --             --           29,958       29,958
Real estate-mortgage,
  installment and
  other..............     42,146         68,621          266,451      377,218
                        --------       --------         --------     --------
     Total...........   $ 99,951       $ 91,902         $376,450     $568,303
                        ========       ========         ========     ========

                                       3
<PAGE>




     The following table sets forth the dollar amount of all loans due within
one year after March 31, 2002 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....................   $13,141        $44,664       $57,805
Real estate construction...........        --             --            --
Real estate-mortgage, installment
   and other.......................    32,744          9,402        42,146
                                      -------        -------       -------
     Total.........................   $45,885        $54,066       $99,951
                                      =======        =======       =======

     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, 2002,
approximately 52.9% 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, 2002, adjustable mortgage loans totalled
$14,386,260 or 5.75% of total originations as compared to $515,600 or .34% of
total originations for the year ended March 31, 2001.

     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,
2002, the Bank had $85,705,046, or 14.05% of total loans outstanding in
construction loans, as compared to $57,080,355, or 8.98% of total loans at
March 31, 2001.  At March 31, 2002, $55,746,760 or 65.04% 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
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.

                                     4

<PAGE>



     Multi-Family, Business and Commercial Loans.  These types of loans
constituted $236,144,893 or approximately 38.70% of Horizon Bank's loan
portfolio at March 31, 2002.  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, 2002, $44,664,042 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 in the economy generally.
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, 2002, the
Bank held $24,136,593 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 80% of the value of the
collateral, or 80% 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 branches.
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, 2002, the Bank was servicing loans for others aggregating approximately
$228,874,332 for which it generally receives a fee payable monthly of .25% to
..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.  Horizon Bank issues commitments to originate
conventional mortgage loans on existing residential dwellings.  Loan
commitments are made for periods up to 60 days from the date of loan
application and are

                                      6

<PAGE>



generally based upon the prevailing market rate at the time of application.
At March 31, 2002, such commitments amounted to $6,046,650.

     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, 2002 was $5,612,704.  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 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 2002, the Bank modified
$14,968,652 of real estate loans, compared to $20,842,647 in fiscal 2001.

     Delinquent Loans, Loans in Foreclosure and Foreclosed Property.  Real
estate 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, 2002, the Bank had
11 loans over 90 days delinquent and one real estate owned with a balance of
$957,775.  Management does not anticipate incurring material losses from these
loans.  As of March 31, 2001, the Bank had one borrower who had loans totaling
approximately $17,000,000.  Subsequent to the prior year end the borrower had
become late on two regularly scheduled payments and had acknowledged that it
had current temporary working capital shortages.  As of March 31, 2002,
conditions have improved sufficiently that the loan is no longer considered
impaired.

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

                                             At March 31,
                       ------------------------------------------------------
                          2002       2001        2000       1999       1998
                       ---------  ---------  ----------  ---------  ---------

Non-accrual loans..... $      --  $      --  $  455,000  $      --  $ 138,000
Loans 90 days or
 more delinquent and
 accruing interest....   618,346    832,299     456,729    383,000     30,345
Restructured loans....        --         --          --         --         --
Real estate acquired
 through foreclosure..   339,429         --     323,468         --         --
                       ---------  ---------  ----------  ---------  ---------
  Total............... $ 957,775  $ 832,299  $1,235,197  $ 383,000  $ 168,345
                       =========  =========  ==========  =========  =========


As a percentage of
 net loans............    0.17%      0.14%       0.21%      0.07%     0.04%
As a percentage of
 total assets.........    0.12%      0.11%       0.17%      0.06%     0.03%

     The Bank had no non-accrual loans for the year ended March 31, 2002 and,
therefore, no interest income was recorded on nonaccrual loans for the year
ended March 31, 2002.

                                      7

<PAGE>



     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 informa-
          tion 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.

     -    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).


                                      8

<PAGE>





     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 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, 2002
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,
2002 in the amount of $5,887,482 and $4,976,670 for the year ended March 31,
2001.  The Bank's loan loss reserve as of March 31, 2002, is approximately
1.04% of net loans receivable.

                                      9

<PAGE>




<PAGE>
<TABLE>

     The following table sets forth an analysis of the Bank's allowance for loan losses for the periods
indicated.
                                                                 Year Ended March 31,
                                        ------------------------------------------------------------------
                                            2002          2001         2000          1999          1998
                                        ----------    ----------    ----------    ----------    ----------


                                     <c>           <c>           <c>           <c>           <c>
Allowance at beginning of period......  $4,976,670    $4,757,152    $4,463,305    $4,085,203    $3,779,761
Provision for loan losses.............   1,089,642       320,000       437,234       484,500       520,500
Recoveries:
   First mortgage loans...............          --            --            --            --            --
   Commercial loans...................          --            --            --            --            --
   Credit card loans..................       3,965         1,146           753            --            --
   Other consumer loans...............       4,300            --            --            --            --
                                        ----------    ----------    ----------    ----------    ----------
     Total recoveries.................       8,265         1,146           753            --            --

Charge-offs:
   First mortgage loans...............     (27,800)      (60,000)      (89,750)      (50,000)     (150,000)
   Commercial loans...................    (147,642)      (21,505)      (10,773)      (40,000)      (50,000)
   Credit card loans..................      (5,410)      (20,123)      (42,896)      (16,398)      (15,058)
   Other consumer loans...............      (6,243)           --          (721)           --            --
                                        ----------    ----------    ----------    ----------    ----------
     Total charge-offs................    (187,095)     (101,628)     (144,140)     (106,398)     (215,058)

     Net charge-offs..................    (178,830)     (100,482)     (143,387)     (106,398)     (215,058)
                                        ----------    ----------    ----------    ----------    ----------
Allowance at end of period............  $5,887,482    $4,976,670    $4,757,152    $4,463,305    $4,085,203
                                        ==========    ==========    ==========    ==========    ==========
Allowance for loan losses as a
percentage of total loans out-
standing at the end of the period.....      0.96%         0.78%         0.77%          0.80%         0.81%

Net charge-offs as a percentage of
average loans outstanding during the
period................................      0.03%         0.02%         0.02%          0.02%         0.05%

Allowance for loan losses as a
percentage of nonperforming loans
at end of period......................    614.70%       597.94%       385.13%      1,165.35%     2,426.69%

</TABLE>
                                                                10
<PAGE>



<PAGE>
<TABLE>

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

                                                         At March 31,
                 -------------------------------------------------------------------------------------------
                       2002                2001              2000               1999               1998
                 ------------------ -----------------  -----------------  ----------------   ---------------
                           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..$3,353,260  51.6%  $1,922,537  37.4%  $1,187,327  27.0%  $1,457,155  24.5%  $1,324,053  22.5%
Residential
 real estate-
 mortgage...... 2,534,222  48.4    3,054,133  62.6    3,569,825  73.0    3,006,150  75.5    2,761,150  77.5
               ---------- -----   ---------- -----   ---------- -----   ---------- -----   ---------- -----
  Total allow-
   ance for
   loan losses.$5,887,482 100.0%  $4,976,670 100.0%  $4,757,152 100.0%  $4,463,305 100.0%  $4,085,203 100.0%
               ========== =====   ========== =====   ========== =====   ========== =====   ========== =====

</TABLE>




     The Bank had an allowance of $50,000, $0, $0, $0 and $0 for real estate
acquired through foreclosure at March 31, 2002, 2001, 2000, 1999 and 1998.

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, 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, 2002 was
$40,986,703 compared to a market value of $46,747,346.  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 2002 Annual Meeting of Stockholders
("Proxy Statement").

     The Bank also invests in mortgage-backed securities.  At March 31, 2002,
such securities had an amortized cost of $33,863,426 and a market value of
$34,589,484.

                                    11

<PAGE>



     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, 2002 was approximately
$81,336,830.  This does not include interest-bearing deposits and cash
equivalents.

                                                 At March 31,
                                     ------------------------------------
                                       2002          2001          2000
                                     --------     --------       --------
                                                (In thousands)
Investment securities:
 U.S. Government:
  Available for sale..............   $ 23,587     $  4,879       $  4,812
  Held to maturity................        369          369            369
                                     --------     --------       --------
                                       23,956        5,248          5,181

Asset-backed securities(1):
  Available for sale..............     29,453       46,978         52,974
  Held to maturity................      4,410        6,530          8,249
                                     --------     --------       --------
                                       33,863       53,508         61,223

Other securities(2):
  Available for sale..............     17,031       10,988          6,124
  Held to maturity................         --           --            500
                                     --------     --------       --------
                                       17,031       10,988          6,624
                                     --------     --------       --------
   Total investments..............     74,850       69,744         73,028

Interest bearing deposits and
  cash equivalents................     83,962       24,508         20,004
                                     --------     --------       --------
                                     $158,812     $ 94,252       $ 93,032
                                     ========     ========       ========

-----------------
(1)  Consists of mortgage-backed securities and CMO's.
(2)  Consists of corporate debt securities and marketable equity securities.

     At March 31, 2002, 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>



<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, 2002.

                                                              At March 31, 2002*
                  ------------------------------------------------------------------------------------------
                      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 politi-
 cal subdivisions:
  Available for
   sale..........$ 4,919  3.74%  $17,758   4.49%   $  910   6.41%   $     --    --%  $23,587  $23,562  4.41%
  Held to
   maturity......     --    --        --     --       369   4.30          --    --       369      374  4.30
                 -------  ----   -------   ----    ------   ----     -------  ----   -------  -------  ----
                   4,919  3.74    17,758   4.49     1,279   5.80          --    --    23,956   23,936  4.41
Mortgage-backed
 securities:
  Available for
   sale..........    647  5.92     6,115   5.39     2,014   7.08      20,677  6.34    29,453   29,988  6.19
  Held to
   maturity......      2  5.92        77   9.39     3,908   6.44         423  9.65     4,410    4,602  6.80
                 -------  ----   -------   ----    ------   ----     -------  ----   -------  -------  ----
                     649  5.92     6,192   5.44     5,922   6.66      21,000  6.41    33,863   34,590  6.27
Other:
  Available for
   sale..........  9,804  5.59     6,237   6.98        --     --         990  6.20    17,031   22,811  6.13
  Held to
   maturity......     --    --        --     --        --     --          --    --        --       --    --
                 -------  ----   -------   ----    ------   ----     -------  ----   -------  -------  ----
                   9,804  5.59     6,237   6.98        --     --         990  6.20    17,031   22,811  6.13
                 -------  ----   -------   ----    ------   ----     -------  ----   -------  -------  ----
   Total.........$15,372  5.01%  $30,187   5.20%   $7,201   6.51%    $22,090  6.40%  $74,850  $81,337  5.64%
                 =======  ====   =======   ====    ======   ====     =======  ====   =======  =======  ====
---------------
*   At March 31, 2002, 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.

<PAGE>
<TABLE>

                                                         Year Ended March 31,
                              -----------------------------------------------------------------------------
                                      2002                       2001                         2000
                              ---------------------       ---------------------       ---------------------
                                           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....................   $ 33,676       2.06%       $ 33,299        2.98%        $ 35,503       3.05%
Checking...................     69,457       0.82          60,360        1.20           42,267       1.27
Money Market...............     95,280       2.80          74,696        3.87           86,322       3.72
Time Deposits..............    406,920       5.20         407,641        6.10          367,458       5.40
                              --------       ----        --------        ----         --------       ----
  Total....................   $605,333       4.14%       $575,996        5.09%        $531,550       4.65%
                              ========       ====        ========        ====         ========       ====

</TABLE>



     The following table indicates the amount of the Bank's deposits by time
remaining until maturity as of March 31, 2002 of $100,000 or more.

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

        Three months or less................      $ 31,668
        Three through six months............        29,363
        Six through twelve months...........        28,661
        Over twelve months..................        34,170
                                                  --------
          Total.............................      $123,862
                                                  ========

     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 (MMK)
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, 2002, the Bank had
$29.1 million in borrowings, compared to $22.9 million at March 31, 2001 and
$39.9 million in borrowings during the year ended 2000.  Access to these
wholesale borrowings allows management to meet cyclical funding needs, and
assists in interest rate risk management efforts.

                                     15

<PAGE>




     The following tables set forth information regarding borrowings by the
Bank at the end of and during the periods indicated.  The tables includes both
short-term and long-term borrowings unless noted otherwise.

                                         For the Year Ended March 31,
                                    ------------------------------------
                                      2002         2001            2000
                                    -------      -------         -------
                                           (Dollars in thousands)
Maximum amount of borrowings
  outstanding at any month end......$35,857      $55,865         $39,853
Approximate average borrowings
  outstanding....................... 27,131       44,817          29,192
Approximate weighted average
  rate paid.........................  5.69         6.73            5.64

                                                At March 31,
                                    ------------------------------------
                                      2002         2001            2000
                                    -------      -------         -------
                                           (Dollars in thousands)
Balance outstanding at end
  of period.........................$29,121      $22,938         $39,853
Weighted average rate paid..........   5.69         6.73            5.64

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, 2002, Horizon Bank employed 187 full-time and 29 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
savings accounts and the form and content of mortgage documents.  The law and
regulations of the State of Washington pertaining to banks and other

                                     16

<PAGE>




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 fiscal 2002.

     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 2002, the
annualized rate was 1.76 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 calculated its leverage ratio
to be 12.67% as of March 31, 2002.

     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 percentage 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

                                     17

<PAGE>




capital to risk-weighted assets must be at least 4%.  The Bank has calculated
its total risk-based ratio to be 20.26% as of March 31, 2002, and its Tier 1
risk-based capital ratio to be 18.93%.  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 required 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.

     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, 2002, Horizon Bank held stock in the FHLB of
Seattle in the amount of $6,243,300.  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 or 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

                                     18

<PAGE>




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, 2002, 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 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;

                                     19

<PAGE>



     (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.

     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 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, 2002, 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                           $95,772       12.67%
         Minimum Tier 1 (leverage) requirement     30,237        4.00
                                                  -------       -----
         Excess                                   $65,535        8.67%
                                                  =======      ======

         Risk-based capital                      $102,508       20.27%
         Minimum risk-based capital requirement    40,464        8.00
                                                  -------       -----
         Excess                                  $ 62,044       12.27%
                                                  =======      ======

                                           20

<PAGE>



     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.

     At its January 19, 2000 meeting, the Board of Directors authorized the
repurchase of up to 10% (approximately 992,450 shares) of the Corporation's
outstanding common stock over a 24 month period.  At its October 24, 2000
meeting, the Board of Directors authorized a new repurchase plan for up to 10%
(approximately 897,000 shares) of the Corporation's outstanding common stock
over a 24 month period.  Shares may be purchased from time to time depending
upon market conditions, price and other management considerations.  During the
fiscal year ended March 31, 2002, the Corporation repurchased 327,952 shares
of its Common Stock, compared to the repurchase of 683,790 shares of its
Common Stock during the prior year.   As of June 5, 2002, the Corporation has
repurchased a total of 543,327 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 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

                                       21

<PAGE>



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.

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.

                                       22

<PAGE>





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, 2002    Feet    Owned
                                   ------   --------------    ----    -----

Bellingham Main Office............  1971      $1,092,281     19,179    Owned
 1500 Cornwall Avenue
 Bellingham, WA 98225

Bellingham/Meridian...............  1987         720,958      4,650    Owned
 4110 Meridian
 Bellingham, WA 98226

Ferndale Office...................  1976         318,049      3,692    Owned
 Third and Main
 Ferndale, WA 98248

Lynden Office.....................  1981         408,780      3,702    Owned
 Third and Grover
 Lynden, WA 98264

Blaine Office.....................  1976         501,726      3,610    Owned
 Fourth & "H" Streets
 Blaine, WA 98230

Mount Vernon Office...............  1976         261,861      3,275    Owned
 1503 Riverside Dr.
 Mount Vernon, WA 98273

Anacortes Office..................  1987         762,349      3,650    Owned
 1218 Commercial Avenue
 Anacortes, WA 98221

Snohomish Office..................  1987         140,265      1,388    Owned
 620 2nd Street
 Snohomish, WA 98290

Everett Office....................  1991          43,059      1,972    Leased
 909 S.E. Everett Mall Way
 #E-500
 Everett, WA 98208

Burlington Office.................  1994       1,082,131      3,980    Owned
 1020 S. Burlington Blvd
 Burlington, WA  98232

                     (table continued on following page)

                                       23

<PAGE>





                                              Net Book
                                    Year     Value as of     Square   Leased/
                                   Opened   March 31, 2002    Feet    Owned
                                   ------   --------------    ----    -----

Edmonds Office...................   1994      $2,187,486     15,265   Owned
 130 Fifth Avenue South
 Edmonds, WA  98020

Murphy's Corner Office...........   2000       1,770,011      3,720   Owned
 12830 Bothell Everett Hwy.
 Everett, WA 98208

Barkley..........................   1999       3,276,785     14,691   Owned
 2122 Barkley Blvd.
 Bellingham, WA 98228

Holly Street Office..............   1999         478,569      4,000   Owned
 211 E. Holly Street
 Bellingham, WA 98227

Alabama Office...................   1999         715,883      4,500   Owned
 802 Alabama Street
 Bellingham, WA 98228

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

Lynnwood Office (1)..............   2002         799,119      3,345   Owned
 19405 44th Avenue W.
 Lynnwood, WA 98036

------------
(1)  Projected to open in September 2002.

     At March 31, 2002, the aggregate book value of the Corporation's premises
and equipment was $15,195,049.

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.

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

     Not applicable.

                                        24

<PAGE>



                                 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 4,251 stockholders.

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

          Fourth                  $13.00   $10.95      $0.12
          Third                    13.00    10.88       0.12
          Second                   12.50     9.50       0.12
          First                    11.75    8.913       0.12

          2001 Fiscal Year
          Quarter                  High      Low     Dividend
          --------------------    -------  ------    --------

          Fourth                  $10.924  $8.913      $0.104
          Third                    10.381   7.826       0.104
          Second                    9.565   7.554       0.104
          First                     8.804   7.310       0.104

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.

                                               March 31,
                         -----------------------------------------------------
                            2002       2001       2000       1999      1998
                         --------   ---------  --------   --------   ---------
                                          (In thousands)
Financial Condition Data:
------------------------

Total Assets............ $772,063   $729,736   $713,914   $668,116   $605,613
Loans Outstanding.......  568,303    597,382    589,584    533,649    478,661
Cash and Investment
 Securities.............  171,346    106,117     99,375    115,194    112,172
Deposits................  628,782    595,914    564,327    537,390    501,293
Borrowings..............   29,121     22,938     39,853     22,718      1,180
Stockholders' Equity....  100,600     97,909     95,935     96,441     86,675

                                      25
<PAGE>




                                        Year Ended March 31,
                        -------------------------------------------------
                          2002     2001       2000     1999(1)    1998(1)
                        -------- --------   -------   --------   --------
                                          (In thousands)
Operating Data:
--------------

Interest Income....... $ 53,091  $ 55,837   $ 49,947  $ 48,119   $45,745
Interest Expense......  (26,541)  (32,239)   (26,257)  (25,267)  (23,991)
Net Interest Income...   26,550    23,598     23,690    22,852    21,754
Other Income..........    4,614     2,951      2,851     3,175     2,267
Non-interest Expense..  (14,891)  (13,756)   (13,243)  (11,357)   (9,934)
Provision for Loan
  Losses..............   (1,089)     (320)      (437)     (484)     (521)
                       --------  --------   --------  --------   -------
Income (Loss) Before
  Taxes...............   15,184    12,473     12,861    14,186    13,566
Federal Income Tax....   (5,130)   (4,202)    (4,180)   (4,844)   (4,598)
                       --------  --------   --------  --------   -------
Net Income............ $ 10,054  $  8,271   $  8,681  $  9,342   $ 8,968
                       ========  ========   ========  ========   =======

Per Common Share:(3)
  Fully-diluted
    earnings..........    $1.14     $0.90      $0.88     $0.94     $0.91
  Dividends...........     0.48      0.42       0.41      0.38(4)   0.72(2)(4)
  Equity..............    11.69     11.05      10.08      9.88      9.22
  Weighted average
    shares
    outstanding.......8,853,652 9,193,661  9,875,705 9,919,413 9,860,291
-------------
(1)  Prior year numbers are restated to reflect the merger of Bellingham
     Bancorporation effective June 19, 1999.
(2)  Includes a special cash dividend of $0.35 declared January 28, 1998.
(3)  Restated for 15% stock dividend effective May 11, 2001.
(4)  Prior year numbers based on shares outstanding prior to merger for each
     respective year.

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,
                                                     ---------------------
                                                     2002     2001    2000
                                                     ----     ----    ----

Return on average assets (net income divided by
  average total assets)............................  1.35%    1.14%   1.26%

Return on average equity (net income divided by
  average equity).................................. 10.14     8.58    9.02

Dividend payout ratio (dividends declared per share
  divided by fully-diluted earnings per share)..... 42.11    46.38   46.53

Equity to assets ratio (average equity divided by
  average total assets)............................ 13.29    13.43   13.92

Interest rate spread (difference between average
  yield on interest-earning assets and average
  cost of interest bearing liabilities)............  3.36     2.89    3.14

Net yield on earning assets (net interest income as
  a percentage of average interest earning assets).  3.78     3.42    3.65

                                      26
<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 14 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    55   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     52   President, Chief Operating Officer and director of
                          the Bank; Executive Vice President and director of
                          the Corporation

Richard P. Jacobson  39   Vice President and Secretary of the Corporation and
                          Executive Vice President and Secretary of the Bank

A.R. (Gus) Ayala     52   Senior Vice President of the Bank

Karla C. Lewis       55   Senior Vice President of the Bank

Kelli J. Holz        33   Vice President of the Corporation and the Bank

Karen A. LePage      61   Vice President of the Corporation and the Bank

                     (footnotes on following page)

                                    27
<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 will continue 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 15 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.

     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.

     KAREN A. LEPAGE has been employed by the Bank since 1958.  In December
1985, she was promoted to Vice President.

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.

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

     (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.

                                       28

<PAGE>



     (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, 2002.


<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.............        469,413           $9.36                  20,683

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 sections captioned "Voting Securities
and Principal Holders Thereof" in the Proxy Statement is incorporated herein
by reference.

                                 PART IV

Item 14.  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, 2002
            and 2001*
          Consolidated Statement of Income for the years ended March 31,
            2002, 2001 and 2000*
          Consolidated Statement of Stockholders' Equity  for the years
            ended March 31,2002, 2001 and 2000*
          Consolidated Statement of Cash Flows for the years ended March
            31,2002, 2001 and 2000*

          Notes to Consolidated Financial Statements*

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

                                        29

<PAGE>



      (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, 2002.

(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
            (21)    Subsidiaries of the Registrant
            (23)    Consent of Auditors

                                           30

<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.

                                            HORIZON FINANCIAL CORP.

 Date:  June 21, 2002                       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 21, 2002                        Date:  June 21, 2002

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

    Date:  June 21, 2002                        Date:  June 21, 2002


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 21, 2002                        Date:  June 21, 2002


By: /s/Kelli J. Holz                        By: /s/Frank G. Uhrig
    --------------------------------            -----------------------------
    Kelli J. Holz                               Frank G. Uhrig
    Principal Accounting Officer                Director

    Date:  June 21, 2002                        Date:  June 21, 2002

                                       31

<PAGE>




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

    Date:  June 21, 2002                        Date:  June 21, 2002


By: /s/ Robert C. Tauscher
    -------------------------
    Robert C. Tauscher
    Director

    Date:  June 21, 2002

                                       32
<PAGE>




                                 Exhibit 10.6

                   Severance Agreement with Dennis C. Joines

<PAGE>



                  CHANGE OF CONTROL /SEVERANCE AGREEMENT
                  --------------------------------------

     THIS CHANGE OF CONTROL/ SEVERANCE AGREEMENT (the "Agreement") is made and
entered into as of this 23rd day of April, 2002 (the "Commencement Date"), by
and between HORIZON BANK, a savings bank chartered under the laws of the State
of Washington (the "Bank"), and Dennis C. Joines (the "Executive").

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

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

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

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

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

                                                                            1

<PAGE>

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

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

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

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

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

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

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

2

<PAGE>



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

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

            (a)  If after a Change of Control, the Bank shall terminate the
Executive's employment other than Termination for Cause, or the Executive
shall terminate employment with the Bank for Good Reason within twelve (12)
months following a Change of Control, the Bank shall: (i) pay the Executive
(or in the event of Executive's subsequent death, Executive's beneficiary or
estate, as the case may be), as severance pay, a sum equal to 2.99 times
Executive's annual compensation.  For purposes of this Agreement, "annual
compensation" shall mean all wages, salary, bonus, and other compensation, if
any, paid by the Bank as consideration for the Executive's services during the
twelve (12) month period ending on the last day of the month preceding the
effective date of a Change of Control which is or would be includable in the
gross income of the Executive receiving the same for federal income tax
purposes.  Such amount shall be paid to Executive in a lump sum no later than
sixty (60) days after the date of Executive's termination; and (ii) cause to
be continued for twelve (12) months after the effective date of a Change of
Control, life, medical, dental, and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
the Executive prior to the effective date of a Change of Control, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees on a nondiscriminatory basis.

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

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

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

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

                                                                            3

<PAGE>



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

     5.   Required Regulatory Provisions.
          ------------------------------

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

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

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

     7.  Amendments.
         ----------

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

     8.  Headings.
         --------

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

     9.  Severability.
         ------------

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

     10.  Governing Law.
          -------------

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

     11.  Arbitration.
          -----------

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

4

<PAGE>



     12.  Reimbursement of Fees.
          ---------------------

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

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

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

Attest:                              HORIZON BANK

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

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

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

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

                                     EXECUTIVE

                                     /s/Dennis C. Joines
                                     ------------------------------------

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

                                                                           5

<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 Auditors

<PAGE>



                    CONSENT OF INDEPENDENT ACCOUNTANTS

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 22,
2002, appearing in the 2002 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, 2002.


/s/Moss-Adams LLP


Bellingham, Washington
June 21, 2002

<PAGE>