UNITED STATES
                       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, 2007               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                  (I.R.S. Employer I.D. Number)
incorporation or organization)

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:

Common Stock, par value $1.00 per share           The NASDAQ Stock Market LLC
--------------------------------------------      ---------------------------
          (Title of Each Class)                   (Name of Each Exchange on
                                                       Which Registered)

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


    Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.    YES     NO  X
                                                    ----    ----

    Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act. YES       NO  X
                                                         ----    ----

    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   X    NO
                                           ----    ----
    Indicate by check mark if the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):

Large accelerated filer      Accelerated filer  X    Non-accelerated filer
                        ----                   ----                       ----

    Indicate by check mark whether the  registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  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
September 30, 2006, was $293,083,810 (12,268,054 shares at $23.89 per share).
As of June 5, 2007, the registrant had 12,199,952 shares of common stock
outstanding.

                        DOCUMENTS INCORPORATED BY REFERENCE

    1. Portions of the registrant's Proxy Statement for the 2007 Annual
Meeting of Stockholders. (Part III).

<PAGE>



                             HORIZON FINANCIAL CORP.
                        2007 ANNUAL REPORT ON FORM 10-K
                              TABLE OF CONTENTS
                                                                         Page
                                                                         ----
PART I.
  Item 1. Business
            General.....................................................    1
            Lending Activities..........................................    1
            Investment Activities.......................................   12
            Real Estate Development Subsidiary..........................   15
            Bank Owned Life Insurance...................................   15
            Deposit Activities and Other Sources of Funds...............   15
            Competition.................................................   18
            Personnel...................................................   18
            Regulation and Supervision..................................   19
            Taxation....................................................   24
            Available Information.......................................   26
  Item 1A. Risk Factors.................................................   26
  Item 1B. Unresolved Staff Comments....................................   31
  Item 2. Properties....................................................   31
  Item 3. Legal Proceedings.............................................   33
  Item 4. Submission of Matters to a Vote of Security Holders...........   33
PART II.
  Item 5. Market for Registrant's Common Equity, Related Stockholder
          Matters and Issuer Purchases of Equity Securities.............   33
  Item 6. Selected Financial Data.......................................   36
  Item 7. Management's Discussion and Analysis of Financial
            Condition and Results of Operations.........................   37
            Forward Looking Statements..................................   37
            General.....................................................   38
            Business Strategy...........................................   38
            Operating Strategy..........................................   38
            Critical Accounting Estimate................................   39
            Critical Accounting Policies................................   41
            Comparison of Financial Condition at March 31, 2007 and
              March 31, 2006............................................   42
            Comparison of Operating Results for the Years Ended
              March 31, 2007 and March 31, 2006.........................   46
            Comparison of Operating Results for the Years Ended
              March 31, 2006 and March 31, 2005.........................   49
            Average Balances, Interest and Yields/Costs.................   53
            Rate/Volume Analysis........................................   54
            Liquidity and Capital Resources.............................   54
            Quantitative and Qualitative Disclosures About
              Market Risk...............................................   55
            Contractual Obligations.....................................   56
            Off-Balance Sheet Arrangements..............................   56
            Impact of Inflation.........................................   56
            Recent Accounting Pronouncements............................   57
  Item 7A. Quantitative and Qualitative Disclosures About
           Market Risk..................................................   57
  Item 8. Financial Statements and Supplementary Data...................   58

                        (continued on following page)


                                      (i)
<PAGE>



  Item 9. Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure...........................   91
  Item 9A. Controls and Procedures......................................   91
  Item 9B. Other Information............................................   91
PART III.
  Item 10. Directors, Executive Officers and Corporate
           Governance...................................................   92
  Item 11. Executive Compensation.......................................   92
  Item 12. Security Ownership of Certain Beneficial Owners and
           Management and Related Stockholder Matters...................   92
  Item 13. Certain Relationships and Related Transactions, and Director
           Independence.................................................   93
  Item 14. Principal Accounting Fees and Services.......................   93
PART IV.
  Item 15. Exhibits and Financial Statement Schedules...................   93

                                       (ii)

<PAGE>



                                    PART I

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

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.
At March 31, 2007, the Corporation had total assets of $1.3 billion, total
deposits of $975.3 million and total equity of $123.9 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 Washington state chartered stock savings bank under the name
"Horizon Bank, a savings bank." Effective March 1, 2000, the Bank changed its
name to its current name, "Horizon Bank."  The Bank became a member of the
Federal Home Loan Bank ("FHLB") of Seattle in December 1998. Effective August
1, 2005, the Bank converted from a Washington chartered savings bank organized
under Title 32 of the Revised Code of Washington ("RCW") to a Washington
chartered commercial bank organized under Title 30 of the RCW.

     The Bank's operations are conducted through 19 full-service office
facilities, four commercial loan centers, and four real estate loan centers,
located in Whatcom, Skagit, Snohomish, and Pierce counties in Northwest
Washington.  The Bank opened commercial banking/loan centers in Bellingham and
Everett, Washington, and expanded its operations in Burlington, Washington
during the first quarter of fiscal 2004.  In November 2004, the Bank opened a
full service office in Marysville, Washington.  In April 2005, the Bank opened
a full service office in Lakewood, Washington, located in Pierce County, just
south of Tacoma.  The Bank opened a full service regional facility in June
2006, which replaced the Bank's existing office and commercial banking center
in south Everett.  During the third quarter of fiscal 2007, the Bank entered
into a lease agreement to open a branch in Puyallup, Washington which opened
in June of 2007 to expand its presence in Pierce County.

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

     General.  The Bank's loan portfolio, net totaled $1.1 billion at March
31, 2007, representing approximately 83% of its total assets.  On that date,
11.7% of net loans receivable consisted of loans secured by mortgages on
one-to- four family residential properties, 5.0% consisted of loans secured by
mortgages on multi-family residential properties, and 80% consisted of
construction and land development loans, commercial loans and commercial real
estate loans.  The balance of the Bank's outstanding loans at that date
consisted of secured and unsecured consumer loans and loans secured by savings
deposits.

     The Bank originates both fixed rate and adjustable rate mortgages
("ARMs") secured by residential, business, and commercial real estate.

     The 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, Snohomish and Pierce 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 enable it 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 the: (i) origination of long-term,
fixed-rate mortgage loans when such loans are written to specifications
promulgated by the Federal Home Loan Mortgage

                                        1

<PAGE>



Corporation ("Freddie Mac") 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.

     The following table provides selected data relating to the composition of
the Bank's loan portfolio by type of loan at the dates indicated.  The changes
represented in the table below reflect the changes in the Bank's lending
strategies, which began in 1999 when the Bank shifted its focus from a
traditional thrift institution to that of a community commercial bank.  As
part of this shift in strategy, the Bank began selling much of its one-to-four
family loan production into the secondary market on a servicing released
basis.  In addition, as repayments were received on its one-to-four family
loan portfolio, the funds were used to support the growth in the commercial
loan categories, as shown in the table below.



<PAGE>
<TABLE>
                                                         At March 31,
                    ----------------------------------------------------------------------------------------
                          2007             2006              2005               2004               2003
                    ---------------   ---------------   ---------------    ---------------   ---------------
                    Amount  Percent   Amount  Percent   Amount  Percent    Amount  Percent   Amount  Percent
                    ------  -------   ------  -------   ------  -------    ------  -------   ------  -------
                                                      (Dollars in thousands)

                <c>        <c>    <c>        <c>    <c>        <c>     <c>        <c>    <c>       <c>
Type of Loan:
First mortgage loans:
 One-to-four
  family
  residential.....$  149,885   14.2% $148,515   16.2%  $167,454   20.8%  $173,908   26.4%  $308,997    53.1%
 One-to-four
  family
  construction....    28,576    2.7    20,971    2.3     16,464    2.1     14,165    2.2     22,680     3.9
 Participations
  sold............   (54,592)  (5.2)  (56,546)  (6.2)   (65,125)  (8.1)   (74,279) (11.3)  (137,173)  (23.6)
                  ----------  -----  --------  -----    -------  -----   --------  -----   --------   ------
    Subtotal......   123,869   11.7   112,940   12.3    118,793   14.8    113,794   17.3    194,504    33.4
 Construction and
  land develop-
  ment............   405,348   38.4   262,358   28.6    162,726   20.2    132,436   20.1     74,576    12.8
 Multi-family
  residential.....    52,727    5.0    70,080    7.6     73,397    9.1     53,344    8.1     56,930     9.8
 Commercial real
  estate..........   292,212   27.7   314,299   34.2    312,722   38.9    250,340   38.0    181,097    31.1
 Commercial loans.   146,265   13.9   123,445   13.4    109,387   13.6     87,233   13.2     55,326     9.5
 Home equity
  secured.........    45,307    4.3    44,001    4.8     33,762    4.2     25,539    3.9     21,442     3.7
 Other consumer
  loans...........     5,031    0.5     5,571    0.6      5,961    0.7      5,662    0.9      6,900     1.2
                  ----------  -----  --------  -----    -------  -----   --------  -----   --------   ------
    Subtotal......   946,890   89.8   819,754   89.2    697,955   86.7    554,554   84.2    396,271    68.1
                  ----------  -----  --------  -----    -------  -----   --------  -----   --------   ------
    Total loans
     outstanding.. 1,070,759  101.5   932,694  101.5    816,748  101.5    668,348  101.5    590,775   101.5
Less:
 Loan loss
  reserve.........   (15,889)  (1.5)  (14,184)  (1.5)   (11,767)  (1.5)   (10,122)  (1.5)    (8,506)   (1.5)
                  ----------  -----  --------  -----    -------  -----   --------  -----   --------   ------
 Net loans
  receivable......$1,054,870  100.0% $918,510  100.0%  $804,981  100.0%  $658,226  100.0%  $582,269   100.0%
                  =========== =====  ========  =====   ========  ======  ========  ======  ========   =====
</TABLE>



    Loan Maturity.  The following table sets forth certain information at
March 31, 2007 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity.  Demand loans 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
                             1 Year         5 Years       5 Years
                           After March    After March    After March
                            31, 2007        31, 2007       31, 2007    Total
                           -----------    -----------    -----------   ------
                                            (In thousands)
Commercial, commercial
 real estate, multi-
 family, construction
 and land development....   $676,995        $165,644      $ 39,826  $  882,465
One-to-four family
 construction............         --              --        28,576      28,576
One-to-four family
 residential, home
 equity, and other
 consumer loans..........     67,562          33,869        42,398     143,829
                            --------        --------      --------  ----------
  Total..................   $744,557        $199,513      $110,800  $1,054,870
                            ========        ========      ========  ==========

                                        2

<PAGE>



    The following table sets forth the dollar amount of all loans due after
one year after March 31, 2007 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, commercial real estate,
 multi-family construction and land
 development.......................      $   73,965    $ 131,505    $  205,470
One-to-four family construction....          28,576           --        28,576
One-to-four family residential, home
 equity, and other consumer loans..          50,915       25,352        76,267
                                         ----------    ---------    ----------
  Total............................      $  153,456    $ 156,857    $  310,313
                                         ==========    =========    ==========

    Multi-Family, and Commercial Real Estate Lending.  Commercial real estate
loans, including multi-family, totaled $344.9 million, or 32.7% of net loans
receivable at March 31, 2007.  The Bank originates commercial real estate
loans primarily secured by owner-occupied business facilities, apartment
buildings, warehouses, mini-storage facilities, industrial use buildings,
office and medical office buildings, hospitality facilities, commercial land
development and retail shopping centers located in its market area.
Commercial real estate loans typically range in principal amount from $500,000
to $10.0 million.  At March 31, 2007, the largest commercial real estate loan
on one property had an outstanding balance of $17.0 million and is secured by
a destination resort and surrounding real estate located in the Bank's market
area.  This loan was performing according to its terms at March 31, 2007.  At
March 31, 2007, the Bank had two other loans with net balances in excess of
$10.0 million, which are secured by commercial real estate.

    Commercial adjustable rate mortgage loans are originated with variable
rates which generally adjust annually after an initial period ranging from one
to five years.  These adjustable rate mortgage loans have generally utilized
Prime or FHLB Advance Rates as indices, with principal and interest payments
fully amortizing over terms of 15 to 25 years, and are generally due in ten
years.  The Bank  has also originated fixed rate commercial loans due in five
to 10 years, (with amortization terms of ten to 25 years), along with 15 year
fully amortizing loans.  Commercial loans originated with interest rates fixed
for the initial three, five and ten year terms generally contain prepayment
penalties during their fixed rate period ranging from 1.0% to 5.0% of the
loan's outstanding balance.

    The Bank requires appraisals or evaluations on all properties securing
commercial real estate loans.  The Bank considers the quality and location of
the real estate, the credit of the borrower, the cash flow of the project and
the quality of management involved with the property.  The Bank generally
imposes a minimum debt coverage ratio of approximately 1.20 times for
originated loans secured by income producing commercial properties.  The Bank
generally obtains loan guarantees from financially capable parties based on a
review of personal financial statements, or if the borrower is a corporation,
the Bank also generally obtains personal guarantees from corporate principals
based on a review of the principals personal financial statements.

    Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one-to-four
family residential lending.  However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than  one-to-four family residential mortgage
loans.  Because payments on loans secured by commercial properties often
depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy.  The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 80% and carefully reviewing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan.  The year-over-year decline in
the commercial real estate portfolio is attributable to the Bank's desire to
focus its efforts on the more profitable adjustable rate construction and land
developments loans.  Due to the Bank's commitment to its pricing and
profitability targets, the balances in the commercial real estate and
multi-family loan portfolio declined in this aggressively priced arena during
the year.

                                       3

<PAGE>



    Construction and Land Development Loans.  Construction lending provides
the Bank the opportunity to achieve higher interest rates and fees with
shorter terms to maturity than does its other real estate lending activities.
Construction lending, however, generally involves a higher degree of risk than
permanent financing for a finished residence or commercial building, because
of the inherent difficulty in estimating both the estimated cost of the
project and the property's value at completion.  If the estimated cost of
construction proves to be inaccurate, the Bank may be required to advance
funds beyond the amount originally committed to complete the project.

    The nature of these loans is such that they are generally more difficult
to evaluate and monitor.  To address this risk, and because of the level of
construction loans in the Bank's portfolio, the Bank has personnel dedicated
specifically to monitoring the progress of its construction projects, and
making on-site inspections of the property.  In addition, in an effort to
monitor the available inventory in its markets, the Bank also regularly
reviews the overall building and development activity in its markets.  Also,
to mitigate the risks related to construction lending, the Bank primarily
deals with experienced builders, with acceptable credit histories, sound
financial statements, and a proven track record in the industry.  In addition,
the Bank utilizes the services of experienced inspectors to monitor the
progress and draw process in the more complex construction projects.  The Bank
also has an experienced appraisal staff, and members of senior management with
related appraisal education and experience, who review each appraisal utilized
by the Bank in analyzing prospective construction projects.  Finally, members
of the Bank's senior management and loan committees also have a significant
amount of experience in the areas of construction lending, appraisals, and
loan underwriting, further mitigating the Bank's risk in this area.

    The Bank actively originates construction loans through both its Mortgage
Loan Division and its Commercial Loan Division.  The Bank's Mortgage Loan
Division generally oversees the single family custom construction loans, and
to a lesser extent, speculative construction loans (i.e., loans for homes that
do not have a contract with a buyer for the purchase of the home upon
completion of the construction) to smaller contractors building a limited
number of speculative homes per year.  These construction loans are further
broken down in the first two lines of the table below (speculative
construction one-to-four family and custom construction one-to-four family).
The Bank's Commercial Lending Division is responsible for the speculative
construction projects for the Bank's larger builders (including large
one-to-four family developments), in addition to the Bank's multi-family
construction loans, non-residential commercial construction loans, and the
Bank's land development loans.

    At March 31, 2007 and 2006, the composition of the Bank's construction
loan portfolio was as follows:

                                                 At March 31,
                                ----------------------------------------------
                                       2007                     2006
                                --------------------     ---------------------
                                Amount (1)   Percent     Amount (1)    Percent
                                ---------    -------     ---------     -------
                                            (Dollars in thousands)
Speculative construction one-
 to-four family...............  $  13,694     3.16%      $   8,675      3.10%
Custom/presold construction
 one-to-four family...........     14,882     3.43          12,296      4.30
Commercial/speculative
 construction one-to-four
 family.......................    177,602    40.93          95,534     33.70
Commercial construction
 multi family.................      6,986     1.61           6,927      2.40
Commercial construction-
 nonresidential...............     84,417    19.45          56,328     19.90

Land development..............    136,343    31.42         103,569     36.60
                                ---------   ------       ---------    ------
 Total........................  $ 433,924   100.00%      $ 283,329    100.00%
                                =========   =======      =========    =======
---------
(1)     Includes loans in process.

    Speculative construction one-to-four family loans increased 57.9% from the
prior year to $13.7 million at March 31, 2007.  These loans are made to home
builders who generally build one or two speculative construction homes per
year, and the increased activity in this period was a result of an active real
estate market in the Bank's markets.  Because of the nature of these loans, a
buyer for these homes is found by the builder either during the construction
phase or shortly after completion of the home's construction.  If a buyer is
not found in a timely manner, the builder will incur additional interest,
marketing and other expenses until the home is sold.  As a result, these loans
carry a higher degree of risk than loans on homes already completed and custom
construction loans (discussed below) for which there is a buyer.

                                      4

<PAGE>



    Custom construction for one-to-four family loans increased 21.0% from the
prior year to $14.9 million at March 31, 2007.  Unlike speculative
construction loans, custom construction loans are made to customers who have
entered into a contract with a builder to build them a custom home.  The
construction portion of these loans are generally for a period of one year or
less, and the Bank generally commits to the long-term take-out financing for
the customer at the time the construction loan is originated.  As a result,
the risk for custom construction loans is generally less than for speculative
construction loans.

    Commercial speculative construction one-to-four family residential loans
increased 85.9% from the prior year to $177.6 million at March 31, 2007.
Commercial speculative construction loans include loans made to the Bank's
larger contractors, who build a significant number of speculative construction
one-to-four family homes each year.  The Bank has established relationships
with experienced builders in this regard, which, along with an active
residential market in the Pacific Northwest, resulted in this significant year
over year growth in this portion of the Bank's construction portfolio.  The
Bank generally limits the loan to value to 85% of the discounted value of the
completed dwellings, and further manages its risk by limiting the number of
homes that can be under construction at any one time, when appropriate.

    The commercial construction multi-family portion of the Bank's portfolio
increased 0.09% from the prior year, to $7.0 million at March 31, 2007, and is
the smallest portion of the Bank's construction portfolio at this time.  This
is primarily because the Bank's relationships are more heavily concentrated
with one-to-four family contractors and developers than multi-family
contractors at this time.  These loans are generally for the construction of
apartment units in the Bank's primary market areas.

    Non-residential commercial construction loans increased 49.9% from the
prior year to $84.4 million at March 31, 2007.  These loans are made for a
variety of non-residential real estate properties, including but not
necessarily limited to the retail properties, owner occupied commercial real
estate, office space, mini-storage facilities, hospitality related uses, and
other non-residential uses.  These loans are generally made to the ultimate
end user of the property (i.e., these loans are more similar to custom
construction than speculative construction loans).  However, as a result of
the inherent risks noted above, these loans carry higher risks than completed
properties.  Non-residential commercial construction loans receive the same
degree of monitoring by the Bank as other construction loans contained in the
Bank's loan portfolio, to mitigate the inherent risks of these loans.

    Land development loans increased 31.6% from the prior year, to $136.3
million at March 31, 2007.  This has been a significant part of the Bank's
strategy in each of its markets, and fiscal 2007 was a successful year of
growth in this category.  Most of these loans carry interest rates tied to
Prime, which allows the Bank to fund the loans profitability with short-term
borrowings.  In addition to the Bank's extensive experience in this area (see
the discussion regarding the Bank's subsidiary, Westward Financial Services,
contained in the section entitled "-- Real Estate Development Subsidiary), the
Bank has continued to expand its expertise by hiring additional members of
senior management dedicated to monitoring this portion of the Bank's lending
activities.  In addition, the Bank has developed  relationships with some of
the area's strongest real estate developers, which has played a significant
part of the Bank's success in this area.  This, however, does not mitigate the
inherent risks in this type of lending.  While the Bank generally limits its
exposure to 75% of the discounted value of the completed lots, it can take a
year or more to complete a large development, therefore increasing the risk to
the Bank and its valuations used at the time the loan is closed.  During the
period from the time the loan is closed until the lots are developed, the
market conditions can change significantly, exposing the Bank to additional
risks in the event the lots can not ultimately be sold at or near the values
estimated at the time of the appraisal.  The Bank's management regularly
monitors the housing demand in its markets, the anticipated supply of building
lots, absorption rates, home and finished lot prices, and related measures in
its efforts to mitigate this risk.  However, no assurances are made that these
or other measures can or will fully mitigate such risks.

    In addition, since the vast majority of the Bank's construction loan
activity is concentrated in the Pacific Northwest, an economic downturn in
this area could have a significant impact on the Bank's performance,
especially in these higher risk construction lending categories.

                                         5

<PAGE>



    Commercial Loans.  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.  These types of loans
constituted $146.3 million, or approximately 13.9% of the Bank's net loan
portfolio at March 31, 2007.  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
borrower 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  and monitoring their assigned accounts.

    One-to-Four Family Residential Loans.  In the past, a significant lending
activity of the Bank was 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, and
loans made to purchase or refinance improved buildings to be used for
residential housing.  At March 31, 2007, approximately 11.7% of the Bank's net
loans receivable consisted of loans secured by one-to-four 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 Freddie Mac.  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.

    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 to a fixed rate loan
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 secondary market.

    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 mobile home parks.

    Horizon Bank offers 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, 2007, the Bank
held $50.3 million of consumer loans or 4.8% of net loans receivable,
approximately $3.4 million of which is unsecured.

    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.

                                        6

<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 officers of the
Bank or members of the Bank's Loan Committee approve consumer loan requests.

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

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

    The Bank accepts completed loan applications from all of its offices and
processing is substantially centralized.  Detailed  information is obtained to
determine the creditworthiness of the borrower and the borrower's ability to
repay.  Significant items appearing on the loan 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 or three members of
the Loan Committee depending on the size of the loan.  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.

    Loan assumption requests of adjustable rate loans are handled by the Bank
in a manner similar to new loan requests.  Secondary market 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.

    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 Freddie Mac and Federal National
Mortgage Association ("Fannie Mae").  The Bank's general practice is to close
its fixed-rate, one-to-four family residential loans on Freddie Mac loan
documents in order to facilitate future sales to Freddie Mac 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 deposit flows decline or funds are otherwise unavailable
for lending purposes.  As of March 31, 2007, the Bank was servicing loans for
others aggregating approximately $55.0 million for which it generally receives
a fee payable monthly of 0.25% to 0.375% per annum of the unpaid balance of
each loan.  In February 2001, the Bank began selling much of its current loan
production on a servicing released basis, and plans to continue doing so for
many of the long-term fixed rate loan originations.  All sales of loan
interests by the Bank are made without right of recourse to the Bank by the
buyer of the loan interests in the event of default by the borrower.

    The Bank also buys and sells portions of commercial loans through
participations with other financial institutions.  As of March 31, 2007, the
Bank was servicing commercial loans for others aggregating approximately $71.0
million for which it generally receives a fee payable monthly of 0.25% to
0.375% per annum of the unpaid balance of

                                        7

<PAGE>



each loan. The Bank has numerous options in this regard, and will continue to
buy and sell, loan participations to assist its liquidity, concentration and
diversification efforts.

    Loan Commitments.  The Bank is a party to financial instruments with
off-balance-sheet risk (loan commitments) made in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates.  Loan commitments involve, to
varying degrees, elements of credit and interest- rate risk in excess of the
amount recognized in the balance sheet.  The contract amounts of those
commitments reflect the extent of the Bank's exposure to credit loss from
these commitments.  The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.

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

    Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party.  Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions.  Except
for certain long-term guarantees, the majority of guarantees expire in one
year.  The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
Collateral supporting those commitments, for which collateral is deemed
necessary, generally amounts to 100% of the commitment amount at March 31,
2007.

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

                                                       At  March 31,
                                                 -------------------------
                                                    2007           2006
                                                 -----------   -----------
                                                      (In thousands)

Commitments to extend credit..................   $383,458(1)     $286,188
Credit card arrangements......................     10,105           9,775
Standby letters of credit.....................      3,056           5,237

---------
(1)The increase in commitments to extend credit at March 31, 2007 was the
result of growth in the Bank's construction and land development loan
portfolio.


    Loan Origination and Other Fees.  In addition to interest earned on loans,
the Bank receives 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 0% to 2.0% for commercial real estate loans.  The
total amount of deferred loan origination fees and unearned discounts at March
31, 2007 was $5.1 million.  Any unamortized loan fees are recognized as income
at the time the loan is sold, paid down 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 because of 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.

                                       8

<PAGE>



    Loan Modifications.  The Bank offers a loan modification program to assist
existing customers who are considering refinancing their home loans.  For a
fee the Bank will modify customers' loans under the program.  No new principal
is required and only the interest rate and payment amounts are changed.  All
other terms and conditions remain the same.  In fiscal 2007, the Bank modified
$12.0 million of real estate loans, compared to $5.2 million during fiscal
2006 when interest rates were lower and there was greater refinance activity.

    Delinquent Loans, Loans in Foreclosure and Foreclosed Property.  Loans are
defined as delinquent when any payment of principal and/or interest is past
due.  While the Bank generally is able to work out a satisfactory repayment
schedule with a delinquent borrower, the Bank will undertake foreclosure
proceedings if the delinquency is not otherwise resolved within 90 days.
Property acquired by the Bank as a result of foreclosure or by deed in lieu of
foreclosure is classified as "real estate owned" until such time as it is sold
or otherwise disposed of. As of March 31, 2007 there were no loans in the loan
portfolio over 90 days delinquent and five loans on non-accrual status.  The
Bank had one real estate owned at March 31, 2007. Total non-performing assets
represented $1.0 million or 0.07% of total assets at March 31, 2007 compared
to $1.2 million or 0.10% of total assets at March 31, 2006.

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

                                              At March 31,
                             ---------------------------------------------
                               2007      2006     2005      2004     2003
                             -------   -------   -------   ------   ------
                                        (Dollars in thousands)

Non-accrual loans.........   $   226   $ 1,161   $ 1,481   $   --   $  242
Loans 90 days or more
 delinquent and accruing
 interest.................        --        --        --      339      350
Restructured loans........        --        --        --       --       --
Real estate acquired through
 foreclosure..............       725        --        --       63    1,072
                             -------   -------   -------   ------   ------
 Total....................   $   951   $ 1,161   $ 1,481   $  402   $1,664
                             =======   =======   =======   ======   ======
As a percentage of net
 loans....................     0.02%     0.13%     0.18%    0.06%    0.29%
As a percentage of total
 assets...................     0.07%     0.10%     0.15%    0.05%    0.20%

    Additional interest income which would have been recorded had nonaccruing
loans been current in accordance with their original terms was considered
immaterial as of March 31, 2007.  No interest income was recorded on
nonaccrual loans for the year ended March 31, 2007.

    Potential Problem Loans.  At March 31, 2007, the Bank had identified loans
totaling $4.1 million which were considered impaired.  These loans are to one
agricultural borrower where known information about possible credit problems,
causes management to have doubts as to the ability to comply with present loan
repayment terms.

    Reserves for Losses.  The Bank has an active ongoing credit review
function.  The provision for loan losses is maintained at a level sufficient
to provide for probable 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, historical
industry loan loss experience, current and anticipated economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and guarantees securing the loans.  The reserve is based upon
factors and trends identified by management at the time financial statements
are prepared, but the ultimate recovery of loans is susceptible to future
market factors beyond the Bank's control, which may result in losses or
recoveries differing significantly from those provided for in the financial
statements.

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

    *    All loans classified during the previous analysis. Current
         information as to payment history, or actions taken to correct the
         deficiency are reviewed, and changes are made, as appropriate.  If
         conditions have


                                     9

<PAGE>



         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 conditions 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.

    *    Historical loss rates.  Industry loss rates and the Bank's loss rate
         experience (where applicable) are  also considered when analyzing the
         adequacy of the Bank's loan loss allowance

    As required by Statement of Accounting Standard ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, 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 the Bank applies SFAS No. 5, Accounting for
Contingencies.  A reserve factor is applied to homogeneous loan pools that is
consistent with the Bank's experience in that loan pool type or with
historical industry experience if management believes such guidelines are more
appropriate. The applied percentage is also influenced by other economic
factors as noted above.

    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, yet not excessive.  Management increases the amount
of the allowance for loan losses by charges to income and decreases the amount
by loans charged off (net of recoveries).

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

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

    *    Multi-Family Residential - While there have been minimal losses in
         this segment of the portfolio, the rental market is susceptible to
         the effects of an economic downturn.  Although 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
         classification 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


                                        10

<PAGE>



         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, 2007
was adequate yet not excessive 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.

    While the Bank believes it has established its existing allowance for loan
losses in accordance with accounting principles generally accepted in the
United States of America, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to
significantly increase or decrease 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,
2007 in the amount of $15.9 million and $14.2 million for the year ended March
31, 2006.  The Bank's loan loss reserve as of March 31, 2007 and 2006, was
1.51% and 1.54% of net loans receivable, respectively.

    The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.  For each of these periods, management
reviewed the changes in the composition and size of the Bank's loan portfolio,
along with the economic conditions in effect during each period, using the
methodologies presented in the paragraphs above within this section.

                                          Year Ended March 31,
                             ---------------------------------------------
                               2007      2006     2005      2004     2003
                             -------   -------   -------   -------  ------
                                       (Dollars in thousands)

Allowance at beginning of
  period..................   $14,184   $11,767   $10,122   $ 8,506  $5,887
Provision for loan
  losses..................     1,850     2,575     1,700     1,915   2,740
Recoveries:
  First mortgage loans....        --        --        --        --      --
  Commercial loans........        29         1       168        79      --
  Credit card loans.......        12         6         5         6       8
  Other consumer loans....         9        --         1         1      --
                             -------   -------   -------   -------  ------
   Total recoveries.......        50         7       174        86       8

Charge-offs:
  First mortgage loans....        --        --        --        --      --
  Commercial loans........       (75)      (45)     (105)     (253)    (54)
  Credit card loans.......       (51)      (54)     (104)     (124)    (71)
  Other consumer loans....       (69)      (66)      (20)       (8)     (4)
                             -------   -------   -------   -------  ------
  Total charge-offs.......      (195)     (165)     (229)     (385)   (129)

  Net charge-offs.........      (145)     (158)      (55)     (299)   (121)
                             -------   -------   -------   -------  ------
Allowance at end of
 period...................   $15,889   $14,184   $11,767   $10,122  $8,506
                             =======   =======   =======   =======  ======

                     (table continued on following page)


                                       11

<PAGE>



                                          Year Ended March 31,
                             -----------------------------------------------
                               2007       2006      2005      2004     2003
                             -------    -------    -------   -------  ------
                                       (Dollars in thousands)
Allowance for loan losses
as a percentage of net
loans receivable at the
end of the period.........     1.51%      1.54%     1.46%     1.48%    1.35%

Net charge-offs as a
percentage of average loans
outstanding during
the period................     0.01%      0.02%     0.01%     0.05%    0.02%

Allowance for loan losses
as a percentage of
nonperforming assets at
end of period.............  1670.06%  1,221.35%   794.53% 2,518.51%  511.09%


<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,
                    ---------------------------------------------------------------------------------------
                          2007             2006             2005              2004              2003
                    ---------------- ----------------  ---------------   ----------------  ----------------
                            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>
One-to-four
 family residential,
 home equity, and
 other consumer
 loans............. $ 1,030    6.5% $   974     6.9%    $ 1,052    8.9%    $1,574   15.6%    $1,780   20.9%
Commercial,
 commercial real
 estate, multi-
 family,
 construction and
 land development..  14,859   93.5   13,210    93.1      10,715   91.1      8,547   84.4      6,726   79.1
                    -------  -----  -------   -----     -------  -----     ------  -----     ------  -----
 Total allowance
  for loan
  losses..........  $15,889  100.0% $14,184   100.0%    $11,767  100.0%   $10,121  100.0%    $8,506  100.0%
                    =======  =====  =======   =====     =======  =====    =======  =====     ======  =====


</TABLE>


The Bank had an allowance of $110,000, $0, $0, $0 and $0 for real estate
acquired through foreclosure at March 31, 2007, 2006, 2005, 2004 and 2003,
respectively.

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

    Under Washington law, banks are permitted to own U.S. government and
government agency obligations, commercial paper, corporate bonds, mutual fund
shares, and 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, U.S. 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,

                                      12

<PAGE>



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 Bank's investment securities of the type
described above at March 31, 2007 was $48.0 million with a market value of
$53.2 million.  For further information concerning the Bank's investment
securities portfolio, see Notes 3 and 4 of the Notes to the Consolidated
Financial Statements contained in Item 8 of this Form 10-K.

    The Bank also invests in mortgage-backed securities.  At March 31, 2007,
these securities had an amortized cost of $26.4 million and a market value of
$26.4 million.

    The following table presents the amortized cost of the Bank's investment
securities portfolio.  The market value of the Bank's investment securities
portfolio at March 31, 2007 was approximately $79.6 million.  This table also
includes interest-bearing deposits and cash equivalents.

                                                      At March 31,
                                            --------------------------------
                                               2007       2006        2005
                                            ---------  ----------   --------
                                                      (In thousands)
Investment securities:
 U.S. Government:
  Available for sale.......................  $ 41,350   $ 45,925   $ 54,034
  Held to maturity.........................       370        370        370
                                             --------   --------   --------
                                               41,720     46,295     54,404
Mortgage-backed securities(1):
  Available for sale.......................    26,220     23,559     18,353
  Held to maturity.........................       148        482        885
                                             --------   --------   --------
                                               26,368     24,041     19,238
  Other securities(2):
  Available for sale.......................     6,325      8,836     12,762
  Held to maturity.........................        --         --         --
                                             --------   --------   --------
                                                6,325      8,836     12,762
                                             --------   --------   --------
  Total investments........................    74,413     79,172     86,404

Interest-bearing deposits and cash
 equivalents...............................    46,212     33,630     27,158
                                             --------   --------   --------
                                             $120,625   $112,802   $113,562
                                             ========   ========   ========
--------
(1)  Consists of mortgage-backed securities and collateralized mortgage
     obligations ("CMOs").
(2)  Consists of corporate debt securities, marketable equity securities and
     mutual funds.

     At March 31, 2007, 2006 and 2005 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.

                                         13
<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, 2007.

                                                         At March 31, 2007*
                      ------------------------------------------------------------------------------------
                          1 Year        More than       More than       More than           Total
                          or Less     1 to 5 Years    5 to 10 Years     10 Years     Investment Securities
                      -------------   -------------   -------------   -------------  ---------------------
                      Amor-   Aver-   Amor-   Aver-   Amor-   Aver-   Amor-   Aver-  Amor-           Aver-
                      tized    age    tized    age    tized    age    tized    age   tized   Market  age
                      Cost    Yield   Cost    Yield   Cost    Yield   Cost    Yield  Cost    Value   Yield
                      -----   -----   -----   -----   -----   -----   -----   -----  -----   -----   -----
                                                          (Dollars in thousands)

                  <c>     <c>      <c>     <c>     <c>     <c>    <c>     <c>    <c>      <c>     <c>
U.S. government,
agency securities,
state and political
subdivisions:
 Available for
  sale.............. $22,868  4.45% $11,294   2.85% $ 5,601   3.91% $ 1,587   5.49% $41,350  $41,108   3.98%
 Held to
  maturity..........      --    --      370   4.30       --     --       --     --      370      372   4.30
                     ------- -----  -------  -----  -------  -----  -------  -----   ------   ------  -----
                      22,868  4.45   11,664   2.90    5,601   3.91    1,587   5.49   41,720   41,480   3.98
Mortgage-backed
securities:
 Available for
  sale..............      --    --       --     --    5,262   4.61   20,958   4.66   26,220   26,233   4.65
 Held to
  maturity..........       4  7.50      118   6.41       16  10.31       10  10.55      148      157   7.15
                     ------- -----  -------  -----  -------  -----  -------  -----   ------   ------  -----
                           4  7.50      118   6.41    5,278   4.62   20,968   4.66   26,368   26,390   4.66
Other:
 Available for
  sale..............   6,325  7.44       --     --       --     --       --     --    6,325   11,757   7.44
 Held to
  maturity..........      --    --       --      -       --     --       --     --       --        -     --
                     ------- -----  -------  -----  -------  -----  -------  -----   ------   ------  -----
                       6,325  7.44       --     --       --     --       --     --    6,325   11,757   7.44
    Total........... $29,197  5.10  $11,782   2.93  $10,879   4.25  $22,555   4.72   74,413   79,627   4.52
                     =======        =======         =======         =======          ======   ======
</TABLE>

----------
*   At March 31, 2007, yields on the Bank's tax-exempt obligations had not
    been computed on a tax equivalent basis.


                                                       14

<PAGE>



Real Estate Development Subsidiary
----------------------------------

    Westward Financial Services, Inc ("Westward"), a land development company,
is a wholly owned subsidiary of the Bank.  Westward has been in the real
estate development business since the 1970s, primarily focused on residential
land development.  Westward completed a 110 lot residential development in
north Bellingham ("Stoneybrook"), in fiscal 2006.  Income attributable to
Westward totaled $45,932, $364,668 and $491,143 for fiscal years 2007, 2006
and 2005, respectively.  The majority of the lot sales for the "Stoneybrook"
development occurred prior to fiscal 2007, which accounts for the differing
income amounts in these periods.

    In October 2004, Westward entered into a real estate development joint
venture in Greenbriar Northwest LLC ("GBNW"), an established residential land
development company headquartered in Bellingham,Washington (50% owned by
Westward and 50% by Greenbriar Construction, a Bellingham based real estate
development company).   This joint venture involves approximately 85 acres of
land in south Bellingham, and current plans include developing the property
into 739 residential units, in a new neighborhood to be known as "Fairhaven
Highlands."   The investment in real estate is recorded as an asset on the
Corporation's balance sheet, and the related debt is recorded as a liability.
At March 31, 2007, the real estate joint venture has a carrying amount of
approximately $17.2 million, with a related borrowing of approximately $20.2
million.  One-half of the borrowing expense related to the joint venture is
recognized as an expense on the Corporation's financial statements as
incurred, with the remainder being capitalized.  The Corporation is presently
not recognizing any income related to this joint venture, as it is in the
early stages of development.  For additional details on this joint venture,
please see Note 1   Nature of Operations and Summary of Significant Accounting
Policies, of the Notes to the Consolidated Financial Statements contained in
Item 8 of this Form 10-K.

Bank Owned Life Insurance
-------------------------

    At March 31, 2007, the Bank held $19.4 million in bank owned life
insurance ("BOLI"), compared to $13.7 million at March 31, 2006.  These
policies are with Northwestern Mutual Life, Mass Mutual and New York Life,
three of the highest rated BOLI providers.  All three of these firms continue
to receive high ratings from AM Best, Fitch, Standard & Poors and Moodys.

Deposit Activities and Other Sources of Funds
---------------------------------------------

    General.  Savings accounts and other types of deposits have traditionally
been important sources 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 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 ten 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.

                                        15
<PAGE>



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

                                        Year Ended March 31,
                       -----------------------------------------------------
                             2007               2006              2005
                       ----------------- ----------------- -----------------
                                Weighted          Weighted          Weighted
                       Average  Average  Average  Average  Average  Average
      Type             Balance    Rate   Balance    Rate   Balance    Rate
------------------     -------    ----   -------    ----   -------    ----
                                       (Dollars in thousands)

Savings.............  $ 24,029    0.69%  $ 35,275   0.54% $  40,956   0.53%
Checking............   156,200    0.33    147,523   0.29    131,440   0.33
Money Market........   173,483    3.64    143,434   2.41    134,144   1.26
Time Deposits.......   551,671    4.60    458,017   3.50    383,161   2.86
                      --------    ----   --------  ------  --------   -----
  Total.............  $905,383    3.56%  $784,249   2.55%  $689,701   1.92%
                      ========    ====   ========  ======  ========   =====

    The following table indicates the amount of the Bank's deposits by time
remaining until maturity as of March 31, 2007 of $100,000 or more.

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

              Three months or less...........    $   56,201
              Over three through six months..        94,327
              Over six through twelve months.       123,226
              Over twelve months.............        48,982
                                                 ----------
               Total.........................    $  322,736
                                                 ==========

    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.  These include traditional savings 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 ten-year variable rate fixed
term certificates, individual retirement accounts ("IRAs"), qualified
retirement plans, transaction accounts such as regular checking, and money
market deposit accounts ("MMDAs") with and without limited check access.

    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 ten 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 -- $1,000, $10,000, $25,000, $50,000 and higher.  The Bank's Business
MMDA has tiers of $1,000, $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  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 and a $50,000 minimum deposit money market, which have tiered
pricing programs, with interest rates that vary by account dollar balance --
$25,000,

                                       16

<PAGE>



$50,000, $100,000, $250,000 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
its 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 Bank's ability to attract and
retain deposits and its 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. These 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.

    For further information concerning the Bank's savings deposits, reference
is made to Note 8 of the Notes to the Consolidated Financial Statements
contained in Item 8 of this Form 10-K.

    Brokered Deposits.  The Bank also utilizes brokered deposits as a
supplemental source of funding, when appropriate.  During fiscal 2007, the
Bank increased its balances in brokered deposits from $52.9 million at March
31, 2006 to $79.4 million at March 31, 2007.  The rates paid on these deposits
are comparable to the rates on similar term from the Bank's alternative
sources of funding (such as wholesale borrowings, discussed below).  The Bank
intends to continue utilizing brokered deposits to support its funding needs,
when appropriate.

    Borrowings.  In December 1998, the Bank joined the FHLB of Seattle which
provides it with access to a variety of wholesale funding options.  In
addition, the Bank's securities portfolio provides additional borrowing
capacity in the reverse repurchase markets.  The Bank also has other borrowed
funds in the form of retail repurchase agreements.  These agreements are
collateralized by securities held by a safekeeping agent not under control of
the Bank.  These funds are considered overnight borrowings and bear interest
at rates that fluctuate daily based on current market rates.  At March
31, 2007, the Bank had $159.0 million in borrowings, compared to $159.8
million at March 31, 2006.  Access to these wholesale borrowings allows
management to meet cyclical funding needs, and assists in interest rate risk
management efforts.

    The following table sets forth information regarding FHLB of Seattle
advances to the Bank at the end of and during the periods indicated.  The
table includes both long- and short-term borrowings.

                                                   Year Ended March 31,
                                             ------------------------------
                                                2007       2006      2005
                                             ----------  --------  --------
                                                  (Dollars in thousands)

Maximum amount of borrowings outstanding
 at any month end..........................   $195,000   $149,000   $129,500

Approximate average borrowings
 outstanding...............................    165,237    134,070     89,920

Approximate weighted average rate paid on
 borrowings................................      4.74%      3.68%      3.26%

Balance outstanding at end of period.......   $143,500   $149,000   $129,000

Weighted average rate paid on borrowings...      5.03%      4.39%      3.28%


                                          17

<PAGE>



    The Bank also has other borrowed funds in the form of retail repurchase
agreements.  These 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.  The Bank had $14.4 million and $10.8 million
in retail repurchase agreements outstanding as of March 31, 2007 and 2006,
respectively.

    For additional information on borrowings, see Note 9 of the Notes to the
Consolidated Financial Statements contained in Item 8 of this Form 10-K.

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

    The Bank faces strong competition in its market area in originating loans
and attracting deposits.  Competition in originating loans is primarily from
other commercial banks, thrift institutions, 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 commercial
banks, thrift institutions, credit unions and brokerage firms.  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, 2007, Horizon Bank employed 253 full-time and 35 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.

    Executive Officers of the Registrant

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

                         Age at
Name                 March 31, 2007                Position
----------------     --------------   -------------------------------------

V. Lawrence Evans          60         Chairman of the Board, Chief Executive
                                      Officer and President of the
                                      Corporation; and Chairman of the Board
                                      and Chief Executive Officer of the Bank

Dennis C. Joines           57         President, Chief Operating Officer and
                                      Director of the Bank; Executive Vice
                                      President and Director of the
                                      Corporation

Richard P. Jacobson        44         Vice President and Secretary of the
                                      Corporation and Executive Vice President
                                      and Secretary of the Bank

                      (table continued on following page)



<PAGE>
                                       18

<PAGE>



                         Age at
Name                 March 31, 2007                Position
----------------     --------------   -------------------------------------

Steve L. Hoekstra          56         Executive Vice President of the Bank

Kelli J. Holz              38         Vice President of the Corporation and
                                      Senior Vice President of the Bank

    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
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 joined the Bank in 1987 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 and is currently the
Chief Financial Officer.

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

    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.  In March 2007, she was appointed Senior Vice
President of the Bank and is currently the Controller of the Bank.

Regulation and Supervision
--------------------------

    The Bank.

    General.  As a state-chartered, federally insured commercial bank, Horizon
Bank is subject to extensive regulation and must comply with various statutory
and regulatory requirements, including prescribed minimum capital standards.
Horizon Bank is regularly examined by the FDIC and its state regulators, and
files quarterly and periodic reports concerning its activities and financial
condition with its regulators.  The Bank's relationship with depositors and
borrowers also is regulated to a great extent by both federal and state law,
especially in such matters as the ownership of deposit accounts and the form
and content of loan documents.

    Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches.  Federal
and state bank regulatory agencies also have the general authority to limit
the dividends paid by insured banks and bank holding companies if such
payments are deemed to constitute an unsafe and unsound practice.  The
respective primary federal


                                      19

<PAGE>



regulators of the Corporation and the Bank have authority to impose penalties,
initiate civil and administrative actions and take other steps intended to
prevent banks from engaging in unsafe or unsound practices.

    State Regulation and Supervision.  As a state-chartered commercial bank,
the Bank is subject to applicable provisions of Washington law and
regulations of the Washington State Department of Financial Institutions.
State law and regulations govern the Bank's ability to take deposits and pay
interest, to make loans on or invest in residential and other real estate, to
make consumer loans, to invest in securities, to offer various banking
services to its customers, and to establish branch offices.  The Bank is
subject to periodic examination and reporting requirements by and of the
Washington State Department of Financial Institutions, Division of Banks.

    Federal Deposit Insurance Corporation.  The Bank's deposits are insured up
to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit
Insurance Fund is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006.  As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the fund.  The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.

    The FDIC recently amended its risk-based assessment system for 2007 to
implement authority granted by the Federal Deposit Insurance Reform Act of
2005, which was enacted in 2006 ("Reform Act"). Under the revised system,
insured institutions are assigned to one of four risk categories based on
supervisory evaluations, regulatory capital levels and certain other factors.
An institution's assessment rate depends upon the category to which it is
assigned. Risk category I, which contains the least risky depository
institutions, is expected to include more than 90% of all institutions. Unlike
the other categories, Risk Category I contains further risk differentiation
based on the FDIC's analysis of financial ratios, examination component
ratings and other information. Assessment rates are determined by the FDIC and
currently range from five to seven basis points for the healthiest
institutions (Risk Category I) to 43 basis points of assessable deposits for
the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one
quarter to the next, except that no single adjustment can exceed three basis
points. No institution may pay a dividend if in default of the FDIC
assessment.

    The Reform Act also provided for a one-time credit for eligible
institutions based on their assessment base as of December 31, 1996. Subject
to certain limitations with respect to institutions that are exhibiting
weaknesses, credits can be used to offset assessments until exhausted. The
Bank's one-time credit is expected to be approximately $650,000. The Reform
Act also provided for the possibility that the FDIC may pay dividends to
insured institutions once the Deposit Insurance Fund reserve ratio equals or
exceeds 1.35% of estimated insured deposits.

    In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize a predecessor deposit insurance fund. This payment
is established quarterly and during the calendar year ending March 31, 2007
averaged 1.22 basis points of assessable deposits.

    The Reform Act provided the FDIC with authority to adjust the Deposit
Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is
viewed by the FDIC as the level that the fund should achieve, was established
by the agency at 1.25% for 2007.

    The FDIC has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. There can be no
prediction as to what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS.
Management of the Bank is not aware of any practice, condition or violation
that might lead to termination of the Bank's deposit insurance.

                                      20

<PAGE>



    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 measures, 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 (leverage ratio) 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 is 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 depend on compliance with
capital requirements.

    At March 31, 2007, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.

    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 shareholders' equity and non-cumulative
perpetual preferred stock, less most intangible assets.  Tier 2 capital,
includes Tier 1 capital, and 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% 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.  At March 31, 2007, the Bank had Tier 1
leverage capital of 9.6%.   Horizon Bank has not been notified by the FDIC of
any higher capital requirements specifically applicable to it.   The FDIC
retains the right to require an institution to maintain a higher capital level
based on the institution's particular risk profile.

    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 based on the relative
risk of that category.  In addition, certain off-balance-sheet items are
converted to balance-sheet credit equivalent amounts, and each amount is then
assigned to one of the four categories.  Under the guidelines, the ratio of
total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets
must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets
must be at least 4%.  In evaluating the adequacy of a bank's capital, the FDIC
may also consider other factors that may affect the 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.  At March 31, 2007,
the Bank determined that its total risk-based ratio was 12.0% and its Tier 1
risk-based capital ratio was 10.5%.

    The Washington State Department of Financial Institutions requires that
net worth equal at least 5% of total assets.  Intangible assets must be
deducted from net worth and assets when computing compliance with this
requirement.  At March 31, 2007, Horizon Bank had a net worth of 9.7% of total
assets.

                                        21

<PAGE>



    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.  For additional information concerning the
Bank's capital, see Note 12 of the Notes to the Consolidated Financial
Statements contained in Item 8 of this Form 10-K.

    Federal Deposit Insurance Improvement Act ("FDICIA").  Horizon Bank has
more than $1.0 billion in assets and therefore, is required to comply with the
provisions of  FDICIA.  In general, FDICIA requires the Bank to conduct an
annual independent audit of its financial statements, appoint an independent
audit committee of outside directors, report on and assess management's
responsibilities for preparing financial statements, and establish an internal
control structure.

    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.

    As the primary regulator of the Bank, the FDIC has outlined 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, based
on formulas established by the FHLB.  As of March 31, 2007, Horizon Bank held
stock in the FHLB of Seattle in the amount of $7.2 million.  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, maintain reserves on
transaction accounts and nonpersonal time deposits.  These reserves may be in
the form of cash or non-interest bearing deposits with the regional Federal
Reserve Bank.  NOW accounts and other types of accounts that permit payments
or transfers to third parties fall within the definition of transaction
accounts and are subject to Regulation D reserve requirements, as are any
non-personal time deposits at a savings bank.  Under Regulation D, a bank must
establish reserves equal to 3% of the first $47.6 million of transaction
accounts, of which the first $7.0 million is exempt, and 10% of the remainder.
Currently, there is no reserve requirement on nonpersonal time deposits with
original maturities of less than 1.5 years.  As of March 31, 2007, the Bank
was in compliance with the Federal Reserve Bank's reserve requirements.

                                        22

<PAGE>



    Privacy Standards.  The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), which was enacted in 1999, 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. The Bank is subject to FDIC
regulations implementing the privacy protection provisions of the GLBA. These
regulations require the Bank to disclose its privacy policy, including
identifying with whom it shares "non-public personal information," to
customers at the time of establishing the customer relationship and annually
thereafter.

    Anti-Money Laundering and Customer Identification.  Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") on
October 26, 2001 in response to the terrorist events of September 11, 2001.
The USA Patriot Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. In March 2006, Congress re-enacted certain expiring
provisions of the USA Patriot Act.

    The Corporation.

    General.  The Corporation, as the sole stockholder 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.

    The Bank Holding Company Act.  Under the BHCA, the Corporation is
supervised by the Federal Reserve.  The Federal Reserve has a policy that a
bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner.  In addition, the Federal Reserve provides
that bank holding companies should serve as a source of strength to its
subsidiary banks by being prepared to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity, and should maintain the financial flexibility and capital
raising capacity to obtain additional resources for assisting its subsidiary
banks.  A bank holding company's failure to meet its obligation to serve as a
source of strength to its subsidiary banks will generally be considered by the
Federal Reserve to be an unsafe and unsound banking practice or a violation of
the Federal Reserve's regulations or both.

    The Corporation is required to file quarterly and periodic reports with
the Federal Reserve and provide additional information as the Federal Reserve
may require.  The Federal Reserve may examine the Corporation  and any of its
subsidiaries, and charge the Corporation for the cost of the examination.

    The Corporation and any subsidiaries that it may control are considered
"affiliates" within the meaning of the Federal Reserve Act, and transactions
between the Corporation's bank subsidiary and affiliates are subject to
numerous restrictions.  With some exceptions, the Corporation and its
subsidiaries, are prohibited from tying the provision of various services,
such as extensions of credit, to other services offered by the Corporation, or
our affiliates.

    Sarbanes-Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law on July 30, 2002 in response to
public concerns regarding corporate accountability in connection with the
recent accounting scandals. The stated goals of the Sarbanes-Oxley Act are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.  The Sarbanes-Oxley Act generally
applies to all companies that file or are required to file periodic reports
with the Securities and Exchange Commission ("SEC"), under the Securities
Exchange Act of 1934 ("Exchange Act").

                                         23

<PAGE>



    The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules.  The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.

    Acquisitions.  The BHCA prohibits a bank holding company, with certain
exceptions, from acquiring ownership or control of more than 5% of the voting
shares of any company that is not a bank or bank holding company and from
engaging in activities other than those of banking, managing or controlling
banks, or providing services for its subsidiaries.  Under the BHCA, the
Federal Reserve may approve the ownership of shares by a bank holding company
in any company, the activities of which the Federal Reserve has determined to
be so closely related to the business of banking or managing or controlling
banks as to be a proper incident thereto.  These activities include: 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 U.S. 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 adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for banks.  The Federal Reserve regulations provide
that capital standards will be applied on a consolidated basis in the case of
a bank holding company with $150 million or more in total consolidated assets.
The Corporation's total risk based capital must equal 8% of risk-weighted
assets and one- half of the 8%, or 4%, must consist of Tier 1 (core) capital.
At March 31, 2007, the Corporation's capital position was in excess of these
requirements with total risk based capital of 12.0% of risk-weighted assets
and Tier 1 (core) capital of 10.6% of risk-weighted assets.

    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.

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 10 of
the Notes to the Consolidated Financial Statements contained in Item 8 of this
Form 10-K 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

                                    24

<PAGE>



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 were 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 eliminated 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 required 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 is 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 rules allowed an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years was equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation.  For this purpose, only
home purchase or home improvement loans were included and the institution
could have elected to have the tax years with the highest and lowest lending
activity removed from the average calculation.  If an institution was
permitted to postpone the reserve recapture, it must have begun its six year
recapture no later than the 1998 tax year.  The unrecaptured base year
reserves would 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 stockholders.

    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 Internal Revenue Service
during the past five years.

                                        25

<PAGE>



    Washington Taxation.

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

Available Information
---------------------

    The Corporation's Internet address is www.horizonbank.com.  You may
access, free of charge, copies of the following documents from the
Corporation's website by using the "Investor Relations" button:

    1.   Annual Reports on Form 10-K;

    2.   Quarterly Reports on Form 10-Q; and

    3.   Current Reports on Form 8-K.

    The Corporation makes these reports and certain other information that it
files available on its website as soon as reasonably practicable after filing
or furnishing them electronically with the SEC.  These and other SEC filings
the Corporation are also available, free of charge, from the SEC on its
website at www.sec.gov.  The information contained on the Corporation's
website is not incorporated by reference into this document and should not be
considered a part of this Annual Report on Form 10-K.  The Corporation's
website address is included in this document as an inactive textual reference
only.

Item 1A.  Risk Factors.
-----------------------

    An investment in our common stock is subject to risks inherent to our
business.  Before making an investment decision, you should carefully consider
the risks and uncertainties described below together with all of the other
information included or incorporated by reference in this report.  The risks
and uncertainties described below are not the only ones that affect us.
Additional risks and uncertainties that management is not aware of or focused
on or that management currently deems immaterial may also impair our business
operations.  This report is qualified in its entirety by these risk factors.

    If any of the following risks actually occur, our financial condition and
results of operations could be materially and adversely affected.  If this
were to happen, the value of our common stock could decline significantly, and
you could lose all or part of your investment.

The Maturity and Repricing Characteristics of Our Assets and Liabilities are
Mismatched and Subject Us to Interest Rate Risk Which Could Adversely Affect
Our Net Earnings and Economic Value.

    Our financial condition and operations are influenced significantly by
general economic conditions, including the absolute level of interest rates as
well as changes in interest rates and the slope of the yield curve.  Our
profitability is dependent to a large extent on our net interest income, which
is the difference between the interest received from our interest-earning
assets and the interest expense incurred on our interest-bearing liabilities.

    Our activities, like all financial institutions, inherently involve the
assumption of interest rate risk.  Interest rate risk is the risk that changes
in market interest rates will have an adverse impact on our earnings and
underlying economic value.  Interest rate risk is determined by the maturity
and repricing characteristics of our assets, liabilities and off-
balance-sheet contracts.  Interest rate risk is measured by the variability of
financial performance and economic value resulting from changes in interest
rates.  Interest rate risk is the primary market risk affecting the
Corporation's financial performance.

                                          26

<PAGE>



    The greatest source of interest rate risk to us results from the mismatch
of maturities or repricing intervals for rate sensitive assets, liabilities
and off-balance-sheet contracts.  Additional interest rate risk results from
mismatched repricing indices and formulae (basis risk and yield curve risk),
and product caps and floors and early repayment or withdrawal provisions
(option risk), which may be contractual or market driven, that are generally
more favorable to customers than to us.

    Our primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling, which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments.  The sensitivity of net interest income to
changes in the modeled interest rate environments provides a measurement of
interest rate risk.  The net market value of equity is estimated by separately
valuing our assets and liabilities under varying interest rate environments.
The extent to which assets gain or lose value in relation to the gains or
losses of liability values under the various interest rate assumptions
determines the sensitivity of net equity value to changes in interest rates
and provides an additional measure of interest rate risk.

    The interest rate sensitivity analysis we perform incorporates
beginning-of-the-period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model.  We update and prepare simulation modeling at least quarterly for
review by senior management and the directors. We believe the data and
assumptions are realistic representations of our portfolio and possible
outcomes under the various interest rate scenarios.  Nonetheless, the interest
rate sensitivity of our net interest income and net market value of equity
could vary substantially if different assumptions were used or if actual
experience differs from the assumptions used.

Our Loan Portfolio Contains a Large Percentage of Construction and Land
Development Loans, Commercial Real Estate Loans and Commercial Business Loans
Which Involves a Higher Risk of Loss than Other Types of Lending.

    We have had a significant increase in our commercial real estate and
construction and land development lending since March 31, 2003.  Commercial
and multi-family real estate, construction and land development and commercial
business loans may expose a lender to greater risk of loss than loans secured
by residential real estate and consumer loans because the type of collateral
securing these loans and the large dollar value typically involved.  These
loans also have greater credit risk than residential real estate for the
following reasons and the reasons discussed under "Item 1. Business-Lending
Activities."

    *    Commercial and Multi-family Mortgage Loans.  These loans typically
         involve higher principal amounts than other types of loans, and
         repayment is dependent upon income being generated from the property
         securing the loan in amounts sufficient to cover operating expenses
         and debt service.

    *    Construction and Land Development Loans.  This type of lending
         contains the inherent difficulty in estimating both a property's
         value at completion of the project and the estimated cost (including
         interest) of the project.  If the estimate of construction cost
         proves to be inaccurate, we may be required to advance funds beyond
         the amount originally committed to permit completion of the project.
         If the estimate of value upon completion proves to be inaccurate, we
         may be confronted at, or prior to, the maturity of the loan with a
         project the value of which is insufficient to assure full repayment.
         In addition, speculative construction loans to a builder are often
         associated with homes that are not pre-sold, and thus pose a greater
         potential risk to us than construction loans to individuals on their
         personal residences. Construction loans on land under development or
         held for future construction also poses additional risk because of
         the lack of income being produced by the property and the potential
         illiquid nature of the security.

                                         27

<PAGE>



    *    Commercial Loans.  Repayment is dependent upon the successful
         operation of the borrower's business.

Joint Ventures in Real Estate Development May Expose Us to Additional Risk.

    As indicated in the Real Estate Development Subsidiary section of Part 1,
Item 1 of this Form 10-K, the Bank's wholly owned subsidiary (Westward) is a
land development company which periodically enters into joint ventures to
develop residential real estate.  While Westward has successfully partnered in
various real estate developments since the 1970s, there can be no guarantee
that success in this area will necessarily continue into the future.  This
activity may present additional risk to us, as we are exposed as an equity
investor in the land being developed.  Adverse movements in the value of the
raw land or the values of the fully developed lots would negatively affect our
financial performance.  Adverse changes in real estate development regulations
(i.e. environmental regulations, project density requirements, and other
related development regulatory matters) may also negatively impact our success
in this regard. In addition, this development activity exposes us to potential
reputation risk, as some members of our communities might not necessarily
approve of our involvement as a real estate development partner.  In addition,
certain projects may be perceived negatively by residents of the area where
the properties are being developed, instead of favoring to leave the land in
an undeveloped state.  For these and potentially other reasons related to real
estate development, our joint ventures in real estate development may expose
us to additional risk, and no assurances can be provided regarding continued
success in this area.

Our Profitability Depends Significantly on Economic Conditions in Our Primary
Market Area.

    Our success depends primarily on the general economic conditions of the
State of Washington and the specific local markets in which we operate.
Unlike larger national or other regional banks that are more geographically
diversified, we provide banking and financial services to customers located
primarily in Whatcom, Skagit, Snohmish and Pierce Counties of Washington.  The
local economic conditions in our market areas have a significant impact on the
demand for our products and services as well as the ability of our customers
to repay loans, the value of the collateral securing loans and the stability
of our deposit funding sources.  A significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these local
economic conditions and, in turn, have a material adverse effect on our
financial condition and results of operations.

Housing Market Slowdown and the Effects of the Sub-Prime Market.

    The potential impacts of sub-prime loans originated by others in the
Bank's markets in recent years could adversely impact the Bank's performance.
These sub-prime loans are cited as contributing to the slowdowns in the
housing markets across the country.  As homeowner's face significant increases
in their housing payments when these sub-prime loans reset, this will likely
have an adverse affect on the economy with an increasing supply of housing
units on the market.  It is predicted that these adverse impacts will result
in increased numbers of houses listed for sale (for those facing unaffordable
increases in their monthly housing payments) and it will also likely increase
the number of foreclosures on residential units.  This sub-prime impact is in
its early stages and a significant amount of uncertainty remains (and will
likely remain for some time until the actual impacts can be better
quantified).

If Our Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan
Losses, Our Earnings Could Decrease.

    We make various assumptions and judgments about the collectibility of our
loan portfolio, including the creditworthiness of our borrowers and the value
of the real estate and other assets serving as collateral for the repayment of
many of our loans.  In determining the amount of the allowance for loan
losses, we review our loans and the loss and delinquency experience, and
evaluate economic conditions.  If our assumptions are incorrect, the allowance
for loan losses may not be sufficient to cover losses inherent in our loan
portfolio, resulting in the need for additions to our allowance.  Material
additions to the allowance could materially decrease our net income.  Our
allowance for loan losses was 1.51% of net loans at March 31, 2007.

                                       28

<PAGE>



    In addition, bank regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs.  Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory authorities may
have a material adverse effect on our financial condition and results of
operations.

If External Funds Were Not Available, this Could Adversely Impact Our Growth
and Prospects.

    We rely on deposits and advances from the FHLB-Seattle and other
borrowings to fund our operations.  Although we have historically been able to
replace maturing deposits and advances if desired, no assurance can be given
that we would be able to replace such funds in the future if our financial
condition or the financial condition of the FHLB or market conditions were to
change.

    Although we consider such sources of funds adequate for our liquidity
needs, we may seek additional debt in the future to achieve our long-term
business objectives.  There can be no assurance additional borrowings, if
sought, would be available to us or, if available, would be on favorable
terms.  If additional financing sources are unavailable or are not available
on reasonable terms, our growth and future prospects could be adversely
affected.

Strong Competition Within Our Market Area May Limit Our Growth and
Profitability.

    Competition in the banking and financial services industry is intense.  We
compete in our market areas with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere.  Some of these competitors have substantially greater
resources and lending limits than we do, have greater name recognition and
market presence that benefit them in attracting business, and offer certain
services that we do not or cannot provide.  In addition, larger competitors
may be able to price loans and deposits more aggressively than we do.  Our
profitability depends upon our continued ability to successfully compete in
our market areas.  The greater resources and deposit and loan products offered
by some of our competitors may limit our ability to increase our
interest-earning assets.  For additional information see Item 1, "Business
Competition."

The Loss of Key Members of Our Senior Management Team Could Adversely Affect
Our Business.

    We believe that our success depends largely on the efforts and abilities
of our senior management.  Their experience and industry contacts
significantly benefit us.  The competition for qualified personnel in the
financial services industry is intense, and the loss of any of our key
personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect our business.

If Our Common Stock Was No Longer Included in the Russell 2000 or Russell 3000
Indices There Could be a Reduction in Liquidity and Prices for Our Stock.

    Our common stock is included in the Russell 2000 and Russell 3000 indices.
Inclusion in these indices may have positively impacted the price, trading
volume and liquidity of our common stock, in part, because index funds or
other institutional investors often purchase securities that are in these
indices.  Conversely if our market capitalization falls below the minimum
necessary to be included in either or both of these indices at any annual
reconstitution date, the opposite could occur.

We Are Subject to Extensive Government Regulation and Supervision.

    We are subject to extensive federal and state regulation and supervision
primarily through the Bank and certain non-bank subsidiaries.  Banking
regulations are primarily intended to protect depositors' funds, federal
deposit insurance funds and the banking system as a whole, not shareholders.
These regulations affect our lending practices, capital structure, investment
practices, dividend policy and growth, among other things.  Congress and
federal regulatory agencies continually review banking laws, regulations and
policies for possible changes.  Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could

                                        29

<PAGE>



affect us in substantial and unpredictable ways.  Such changes could subject
us to additional costs, limit the types of financial services and products we
may offer and/or increase the ability of non-banks to offer competing
financial services and products, among other things.  Failure to comply with
laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputation damage, which could have a
material adverse effect on our business, financial condition and results of
operations.  While we have policies and procedures designed to prevent any
such violations, there can be no assurance that such violations will not
occur.  See Item 1, "Business -- Regulation and Supervision."

The Level Of Our Commercial Real Estate Loan Portfolio May Subject Us To
Additional Regulatory Scrutiny.

    The FDIC, the Federal Reserve and the Office of the Comptroller of the
Currency, have recently promulgated joint guidance on sound risk management
practices for financial institutions with concentrations in commercial real
estate lending.  Under the guidance, a financial institution actively involved
in commercial real estate lending should perform a risk assessment to identify
concentrations. A financial institution may have a concentration in commercial
real estate lending if, among other factors,  (i) total reported loans for
construction, land development, and other land represent 100% or more of total
capital or (ii) total reported loans secured by multifamily and non-farm
residential properties, loans for construction, land development and other
land and loans otherwise sensitive to the general commercial real estate
market, including loans to commercial  real estate related entities, represent
300% or more of total capital.  Management should also employ heightened risk
management practices including board and management oversight and strategic
planning, development of underwriting standards, risk assessment and
monitoring through market analysis and stress testing.  While we believe we
have implemented policies and procedures with respect to our commercial real
estate loan portfolio consistent with the guidance, bank regulators could
require us to implement additional policies and procedures consistent with
their interpretation of the guidance which could result in additional costs to
us.

Our Information Systems May Experience an Interruption or Breach in Security.

    We rely heavily on communications and information systems to conduct our
business.  Any failure, interruption or breach in security of these systems
could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems.  While we have
policies and procedures designed to limit the effect of the failure,
interruption or security breach of our information systems, there can be no
assurance that any such failures, interruptions or security breaches will not
occur or, if they do occur, that they will be adequately addressed.  The
occurrence of any failures, interruptions or security breaches of our
information systems could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of operations.

We Rely on Dividends From Our Subsidiaries For Most of Our Revenue.

    Horizon Financial  is a separate and distinct legal entity from its
subsidiaries.  We receive substantially all of our revenue from dividends from
our subsidiaries.  These dividends are the principal source of funds to pay
dividends on our common stock and interest and principal on our debt.  Various
federal and/or state laws and regulations limit the amount of dividends that
Horizon Bank and certain non-bank subsidiaries may pay to Horizon Financial.
Also, our right to participate in a distribution of assets upon a subsidiary's
liquidation or reorganization is subject to the prior claims of the
subsidiary's creditors.  In the event Horizon Bank is unable to pay dividends
to Horizon Financial, Horizon Financial may not be able to service debt, pay
obligations or pay dividends on Horizon Financial's common stock.  The
inability to receive dividends from Horizon Bank could have a material adverse
effect on our business, financial condition and results of operations. See
Item 1, "Business -- Regulation and Supervision."

                                        30

<PAGE>



If We Fail to Maintain an Effective System of Internal Control over Financial
Reporting, We May Not Be Able to Accurately Report Our Financial Results or
Prevent Fraud, and, as a Result, Investors and Depositors Could Lose
Confidence in Our Financial Reporting, Which Could Adversely Affect Our
Business, the Trading Price of Our Stock and Our Ability to Attract Additional
Deposits.

    In connection with the enactment of the Sarbanes-Oxley Act of 2002 ("Act")
and the implementation of the rules and regulations promulgated by the SEC, we
document and evaluate our internal control over financial reporting in order
to satisfy the requirements of Section 404 of the Act.  This requires us to
prepare an annual management report on our internal control over financial
reporting, including among other matters, management's assessment of the
effectiveness of internal control over financial reporting and an attestation
report by our independent auditors addressing these assessments.  If we fail
to identify and correct any significant deficiencies in the design or
operating effectiveness of our internal control over financial reporting or
fail to prevent fraud, current and potential shareholders and depositors could
lose confidence in our Company's internal controls and financial reporting,
which could adversely affect our business, financial condition and results of
operations, the trading price of our stock and our ability to attract
additional deposits.

Item 1B.  Unresolved Staff Comments
-----------------------------------

     None.

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, 2007    Feet     Owned
                                 ------   --------------   ------    -------
                                          (In thousands)

Bellingham Main Office and
 Whatcom Mortgage Center.......   1971        $2,103       19,179     Owned
 1500 Cornwall Avenue
 Bellingham, WA 98225

Bellingham/Meridian............   1987           737        4,650     Owned
 4110 Meridian Street
 Bellingham, WA 98226

Ferndale Office................   1976           240        3,692     Owned
 Third and Main
 Ferndale, WA 98248

Lynden Office..................   1981           580        3,702     Owned
 Third and Grover Streets
 Lynden, WA 98264

Blaine Office..................   1976           581        3,610     Owned
 Fourth & "H" Streets
 Blaine, WA 98230

Mount Vernon Office............   1976           199        3,275     Owned
 1503 Riverside Dr.
 Mount Vernon, WA 98273

                        (table continued on the following page)


                                          31

<PAGE>



                                             Net Book
                                  Year     Value as of     Square    Leased/
                                 Opened   March 31, 2007    Feet     Owned
                                 ------   --------------   ------    -------
                                          (In thousands)

Anacortes Office................. 1987        $  667        3,650     Owned
 1218 Commercial Avenue
 Anacortes, WA 98221

Snohomish Office................. 1987           151        1,388     Owned
 620 2nd Street
 Snohomish, WA 98290

Puyallup Office, Pierce
 Mortgage Center(4).............. 2007           171        3,402    Leased
 413 29th Street NE Street
 Puyallup, WA 98372

Burlington Office, Skagit
 Commercial Center and Skagit
 Mortgage Center................. 1994         1,101        3,980    Owned
 1020 S. Burlington Blvd
 Burlington, WA  98232

Edmonds Office................... 1994         1,934       15,265    Owned
 130 Fifth Avenue South
 Edmonds, WA  98020

Murphy's Corner Office........... 2000         1,573        3,720    Owned
 12830 Bothell Everett Hwy.
 Everett, WA 98208

Barkley Office................... 1999         2,800       14,691    Owned
 2122 Barkley Blvd.
 Bellingham, WA 98228

Holly Street Office.............. 1999           359        4,000    Owned
 211 E. Holly Street
 Bellingham, WA 98227

Alabama Office................... 1999           700        4,500    Owned
 802 Alabama Street
 Bellingham, WA 98228

Marysville Office (1)............ 2004         2,203        4,126    Owned
 3617 88th St NE
 Marysville, WA 98270

Lynnwood Office.................. 2003         2,183        4,230    Owned
 19405 44th Avenue W.
 Lynnwood, WA 98036

Lakewood Office, Pierce Commercial
 Center and Pierce Mortgage
 Center (2)...................... 2005         2,109        4,773    Owned
 10318 Gravelly Lake Dr. SW
 Lakewood, WA 98499

                         (table continued on following page)

                                         32

<PAGE>



                                             Net Book
                                  Year     Value as of     Square    Leased/
                                 Opened   March 31, 2007    Feet     Owned
                                 ------   --------------   ------    -------
                                          (In thousands)
Everett Office, Snohomish
 Commercial Center and Snohomish
 Mortgage Center (3)............  2006        $  6,655     16,000     Owned
 9929 Evergreen Way
 Everett, WA 98204

Whatcom Commercial Center.......  2003             302      5,200     Leased
 2211 Rimland Drive, Suite 230
 Bellingham, WA 98226
__________
(1) Opened in November 2004.
(2) Opened in April 2005.
(3) Opened in June 2006.
(4) Opened in June 2007.

    At March 31, 2007, the aggregate book value of the Corporation's premises
and equipment was $27.6 million.

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 the Bank 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.

                                     PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
---------------------------------------------------------------------------

    Horizon Financial's common stock is traded on The NASDAQ Exchange under
the symbol HRZB.  The common stock began trading on the NASDAQ Exchange at the
time of Horizon Bank's conversion to stock form in August 1986.  The following
table presents the high and low sales prices as reported by the NASDAQ
Exchange and dividends paid for the last two fiscal years.  All share prices
shown below are adjusted for the 5-for-4 stock split, paid in the form of a
stock dividend in October 2006.  The Corporation has approximately 4,500
stockholders.

     2007 Fiscal Year
     Quarter                High         Low         Dividend
     ------------------    ------      -------       --------

     Fourth                $25.00      $20.47         $0.125
     Third                  25.90       22.24          0.125
     Second                 25.84       19.46          0.125
     First                  21.94       16.25          0.120

     2006 Fiscal Year
     Quarter                High         Low         Dividend
     ------------------    ------      -------       --------

     Fourth                $21.08      $16.98         $0.116
     Third                  18.74       15.08          0.116
     Second                 18.16       16.06          0.112
     First                  18.00       14.14          0.112


                                        33

<PAGE>



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

    Horizon Financial 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.

Stock Repurchases
-----------------

    The Corporation has conducted various stock buy-back programs since August
1996.  In March 2006, the Board of Directors approved a stock repurchase
program that continued through the 2007 fiscal year, allowing the Corporation
to repurchase up to 5% of total shares outstanding, or approximately 625,000
shares, adjusted for the 5-for-4 stock split paid in the form of a 25% stock
dividend in October 2006. This marked the Corporation's seventh stock
repurchase program.  During the year ended March 31, 2007, the Corporation
repurchased 144,580 shares at an average price of $20.31.  On March 27,2007,
the Board of Directors authorized the repurchase of 600,000 shares, or
approximately 5% of the Corporation's outstanding shares of common stock for a
12 month period.

    The following table sets forth the Corporation's repurchases of its
outstanding common stock during the fourth quarter of the year ended March 31,
2007.

                               Issuer Purchases of Equity Securities
                     ---------------------------------------------------------
                                                                     (d)
                                                                   Maximum
                                                     (c)          Number (or
                                                 Total Number    Approximate
                                                   of Shares     Dollar Value)
                                                  (or Units)    of Shares (or
                         (a)                     Purchased as  Units) that May
                       Total           (b)          Part of        Yet to Be
                      Number of      Average       Publicly       Purchased
                      Shares (or    Price Paid    Announced       Under the
                        Units)      per Share      Plans or        Plans or
   Period             Purchased      (or Unit)     Programs        Programs
------------------   -----------    ----------   ------------   --------------

January 1, 2007 -
 January 31, 2007...     5,000        23.232       129,080(1)       495,920
February 1, 2007 -
 February 28, 2007..     8,500        23.928       137,580(1)       487,420
March 1, 2007 -
 March 31, 2007.....     7,000        21.958       144,580(1)       480,420
                      --------      --------      -----------      -----------
Total...............    20,500        23.086       144,580(1)       600,000(2)
                      ========      ========      ===========      ===========

---------
(1) Reflects purchases made under the repurchase plan authorized by the Board
    of Directors in March 2006. This program expired on March 31, 2007
(2) Reflects new repurchase plan authorized by the Board of Directors in March
    2007.

Equity Compensation Plan Information

    The equity compensation plan information presented under subparagraph (d)
in Part III, Item 12 of this report is incorporated herein by reference.


                                       34
<PAGE>


    Performance Graph.  The following graph compares the cumulative total
shareholder return on the Corporation's Common Stock with the cumulative total
return on the NASDAQ Index and the SNL Western Bank Index which encompasses
ten western states.  Total return assumes reinvestment of all dividends.




                        [PERFORMANCE GRAPH APPEARS HERE]





                                          Period Ending
                  ------------------------------------------------------------
Index*            03/31/02   03/31/03  03/31/04  03/31/05  03/31/06  03/31/07
----------------  ----------  --------  --------  --------  --------  --------
Horizon Financial
 Corp.              100.00     153.01    194.10    203.19    284.09    313.45
NASDAQ - Composite  100.00      72.68    108.07    108.34    126.79    131.23
SNL Western Bank
 Index              100.00      94.47    129.32    141.60    159.89    170.18


*Source: SNL Financial LC, Charlottesville, VA Used with permission. All
rights reserved.


                                       35

<PAGE>



Item 6.  Selected Financial Data
--------------------------------

    The following table sets forth certain information concerning the
financial position of the Corporation at and for the dates indicated.

                                             At March 31,
                        ------------------------------------------------------
                         2007        2006        2005        2004       2003
                        -------    --------    ---------  --------   ---------
                                            (In thousands)
Financial Condition Data:
------------------------

Total Assets.........$1,270,327   $1,116,728   $997,570   $858,876   $819,872
Loans Receivable,
 net................. 1,054,870      918,510    804,981    658,226    582,269
Cash and Investment
 Securities..........   133,075      125,216    125,966    161,071    197,296
Deposits.............   975,295      834,299    746,849    670,259    646,722
Borrowings...........   158,958      159,837    135,787     67,469     53,763
Stockholders'
 Equity..............   123,855      113,323    107,024    109,307    106,244

                                          Year Ended March 31,
                        ------------------------------------------------------
                         2007        2006        2005        2004       2003
                        -------    --------    ---------  --------   ---------
                                            (In thousands)
Operating Data:
---------------

Interest Income......   $92,600      $69,388    $52,182    $48,979    $50,698
Interest Expense.....   (40,133)     (24,896)   (16,144)   (15,509)   (19,461)
                        -------      -------    -------    -------    -------
Net Interest
 Income..............    52,467       44,492     36,038     33,470     31,237
Provision for
 Loan Losses.........    (1,850)      (2,575)    (1,700)    (1,915)    (2,740)
Noninterest
 Income..............     5,838        5,411      5,713      7,415      6,907
Noninterest
 Expense.............   (27,861)     (24,770)   (21,619)   (19,772)   (17,314)
Income before
 Provision for
 Income Taxes........    28,594       22,558     18,432     19,198     18,090
Provision for
 Income Tax..........    (9,566)      (6,903)    (5,369)    (6,332)    (5,950)
                        -------      -------    -------    -------    -------
Net Income              $19,028      $15,655    $13,063    $12,866    $12,140
                        =======      =======    =======    =======    =======
Per Common Share:(1)
 Fully-diluted
  earnings...........     $1.53        $1.25      $1.01      $0.96      $0.90
 Dividends...........     0.495        0.456      0.424      0.392      0.360
 Book Value..........     10.11         9.16       8.53       8.40       8.03
 Weighted average
  shares
  outstanding........12,409,092   12,542,845 12,952,542 13,357,556 13,581,212
_________
(1) Restated for 25% stock split effective July 23, 2002 and 5-for-4 stock
     split paid in the form of a 25% stock dividend effective October 23,
     2006.
                                         36

<PAGE>



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

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

                                                         At and for the
                                                       Year Ended March 31,
                                                     ------------------------
                                                      2007     2006     2005
                                                     ------   ------   ------
Return on average assets (net income divided
 by average total assets)...........................  1.57%   1.48%    1.43%

Return on average equity (net income divided
 by average equity)................................. 16.11   14.32    12.11

Dividend payout ratio (dividends declared per share
 divided by fully-diluted earnings per share)....... 32.35   36.54    42.06

Equity to assets ratio (average equity divided by
 average total assets)..............................  9.74   10.35    11.84

Interest rate spread (difference between average
 yield on interest-earning assets and average cost
 of interest bearing liabilities)...................  4.60    4.54     4.21

Net yield on earning assets (net interest income
 as a percentage of average interest earning
 assets)............................................  4.73    4.66     4.34

Efficiency ratio (noninterest expense divided by
 the sum of net interest income and noninterest
 income) ........................................... 47.79   49.64    51.78

Non-performing loans ratio (non-performing loans
 divided by net loans)..............................  0.02%   0.13%    0.18%

Non-performing asset ratio (non-performing assets
 divided by total assets)...........................  0.07%   0.10%    0.15%

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

    The following discussion is intended to assist in understanding the
financial condition and results of operations of the Corporation and the Bank.
The information contained in this section should be read in conjunction with
the Consolidated Financial Statements and the accompanying Notes contained in
Item 8 of this Form 10-K.

Forward Looking Statements
--------------------------

    Management's Discussion and Analysis of Financial Condition and Results of
Operations and this Form 10-K contain certain forward-looking statements which
are based on assumptions and describe future plans, strategies and
expectations of the Corporation.  Management desires to take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and is including this statement for the express purpose of availing the
Corporation of the protections of the safe harbor with respect to all
forward-looking statement in this Form 10-K.  These forward-looking statements
are generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar words.  The Corporation's
ability to predict results of the actual effect of future plans or strategies
is uncertain.  Factors which could have a material adverse effect on the
Corporation's operations include, but are not limited to, changes in interest
rates, general economic conditions, legislative/regulatory changes, monetary
and fiscal policies of the U.S. government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the loan
or investment portfolios, demand for loan products, deposit flows,
competition,

                                        37

<PAGE>


demand for financial services in the Corporation's market areas and accounting
principles and guidelines.  These risks and uncertainties should be considered
in evaluating forward-looking statements and you should not rely too much on
these statements.

General
-------

    The Corporation's results of operations depend primarily on revenue
generated as a result of its net interest income and non-interest income.  Net
interest income is the difference between the interest income the Corporation
earns on its interest-earning assets (consisting primarily of loans and
investment securities) and the interest the Corporation pays on its
interest-bearing liabilities (consisting primarily of customer savings and
money market accounts, time deposits and borrowings).  Non-interest income
consists primarily of service charges on deposit and loan accounts, gains on
the sale of loans and investments, and loan servicing fees. The Corporation's
results of operations are also affected by the provisions for loan losses and
other expenses.  Other expenses consist primarily of noninterest expense,
including compensation and benefits, occupancy, equipment, data processing,
marketing, automated teller machine costs and, when applicable, deposit
insurance premiums.  The Corporation's results of operations may also be
affected significantly by general and local economic and competitive
conditions, changes in market interest rates, governmental policies and
actions of regulatory authorities.

Business Strategy
-----------------

    The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to commercial lending,
home mortgage lending, consumer lending, small business lending and providing
quality financial services to local personal and business customers.  The Bank
has sought to implement this strategy by: (i) focusing on commercial banking
opportunities;  (ii) continued efforts towards the origination of residential
mortgage loans, including one-to-four family residential construction loans;
(iii) providing high quality, personalized financial services to individuals
and business customers and communities served by its branch network; (iv)
selling many of its fixed rate mortgages to the secondary market; (v) focusing
on asset quality; (vi) containing operating expenses; and (vii) maintaining
capital in excess of regulatory requirements combined with prudent growth.

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

    The Corporation serves as a holding company for the Bank and other
subsidiaries whereby it provides strategic oversight, management, access to
capital and other resources and activities typically performed by bank holding
companies.  The operating strategy of the Corporation has been to expand and
diversify its consolidated operations across a variety of companies and/or
operating units that are engaged in complementary, but different, businesses
and/or operating strategies.  This diversification strategy is expected to
continue as opportunities arise, although there are no specific acquisitions
or new business formations planned at this time.  The Bank currently has two
offices in Pierce County (south of King County), with the remaining offices
all located north of King County.  Management has further indicated that the
market areas just outside King County (including, but not necessarily limited
to Snohomish, Pierce, Kitsap and Thurston counties) are logical areas for
potential future expansion, as these markets have characteristics most similar
to those in which the Bank has experienced previous success.

    The primary business of the Bank is to acquire funds in the form of
deposits and wholesale funds, and to use the funds to make commercial,
consumer, and real estate loans in its primary market area.  In addition, and
to a lesser extent, the Bank invests in a variety of investment grade
securities including, but not necessarily limited to U.S. Government and
federal agency obligations, mortgage-backed securities, corporate debt, equity
securities, and municipal securities.  The Bank intends to continue to fund
its assets primarily with retail and commercial deposits, although, FHLB
advances, brokered deposits, and other wholesale borrowings, will also likely
be used as a supplemental source of funds.

    The Corporation's profitability depends primarily on its net interest
income, which is the difference between the income it receives on the Bank's
loan and investment portfolio and the Bank's cost of funds, which consists of
interest paid on deposits and borrowings. The Bank reviews its opportunities
with respect to both assets and liabilities.  In the past two fiscal years,
for example, the Bank chose to concentrate its commercial lending efforts on
growing its Prime

                                        38

<PAGE>



based loan portfolio, at a time when many lenders were offering fixed rate
real estate loans at sub-Prime rates.  In this regard, the Bank's loan
portfolio growth is heavily concentrated in the active real estate development
and construction markets in the Puget Sound region.  Through its excellent
relationships with established real estate developers and builders, the Bank's
experienced loan officers were successful at growing this portion of the
Bank's portfolio, which is primarily Prime based business.  This has been
beneficial in recent years, with the Federal Reserve's Open Market Committee's
(FOMC) efforts to increase short terms interest rates, which have in turn
increased the Prime lending rate.  The results of this strategy are discussed
in more detail in the section entitled "Comparison of Operating Results for
the Years Ended March 31, 2007 and March 31, 2006   Net Interest Income."  On
the liability side of the balance sheet, the impact of these increasing rates
has also impacted the Bank's earnings.  Management acknowledges that there is
a lag effect in this regard, as the rates on the Bank's certificate of deposit
liabilities do not adjust instantly, rather the impact occurs more gradually
as the certificates of deposit mature and reprice in a higher rate
environment.

    Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The
Corporation's profitability is also affected by the level of the Bank's other
income and expenses.  Other noninterest income includes income associated with
the origination and sale of mortgage loans, loan servicing fees, deposit
account related fees, and net gains and losses on sales of interest-earning
assets.  This portion of the Bank's income is heavily dependent on the Bank's
success at originating and selling one-to-four family mortgage loans into the
secondary market.  In addition, the Bank's ability to generate fee income on
its deposit accounts impacts this portion of the Bank's income stream.  In
fiscal 2006, the Bank introduced an Overdraft Protection service, which
increased the deposit related fee income and is discussed in more detail in
the section entitled "Comparison of Operating Results for the Years Ended
March 31, 2007 and March 31, 2006."

    Other noninterest expenses include compensation and benefits, occupancy
and equipment expenses, deposit insurance premiums, data servicing expenses
and other operating costs.  In fiscal 2006, the Bank began a Bank-wide
efficiency initiative, soliciting input from all employees and implementing
many of the suggestions it received.  This is an ongoing process, as
management continues to look for ways to improve efficiency. To encourage
employees to participate in this initiative, the Bank includes a profitability
component to the incentive portion of the employee's pay, and efficiency
accounts for one-third of this profitability component.  Also during fiscal
2006, the Bank formed a Core Data Processor task team, to analyze ways to best
utilize its new data processing system.  At the time of conversion in November
2004, the focus was appropriately placed on converting the data from the
previous system.  Subsequently, the focus shifted to ensuring that the Bank
was taking advantage of the benefits offered by the new system, and this is a
process that will continue in future years along with the efficiency
initiative discussed above.

    Finally, the Corporation's results of operations are also significantly
affected by general economic and competitive conditions, particularly changes
in market interest rates, government legislation, regulation, and monetary and
fiscal policies.

Critical Accounting Estimate
----------------------------

    Management recognizes that loan losses occur over the life of a loan, and
that the allowance for loan losses must be maintained at a level sufficient to
absorb probable losses inherent in the loan portfolio.  Management's
determination of the allowance is based on a number of factors, including the
level of non-performing loans, loan loss experience, credit concentrations,
reviews of the quality of the loan portfolio, collateral values, historical
industry loss experience, and uncertainties in economic conditions.  The
allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.

   Management believes that the accounting estimate related to the allowance
for loan losses is a "critical accounting estimate" because: (i) it is highly
susceptible to change from period to period because it requires management to
make assumptions about future losses on loans; and (ii) the impact of a sudden
large loss could deplete the allowance and potentially require increased
provisions to replenish the allowance, which would negatively affect earnings.

                                         39

<PAGE>



    The Corporation has an active ongoing credit review function.  The
allowance for loan losses is maintained at a level sufficient to provide for
estimated, probable 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, historical
industry 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, and continues
to work on enhancing its methodologies in this regard.

    As required by SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, 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 the Bank
applies SFAS No. 5, Accounting for Contingencies.  Reserve factors are applied
to homogeneous loan pools which are consistent with the Bank's experience in
that loan pool type or with industry guidelines if management believes such
guidelines are more appropriate. The applied percentage is also influenced by
other economic factors in the Bank's market area, the state's economy, and
national economic factors that could influence the quality of the loan
portfolio in general.

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

    The Corporation's senior management reviews and analyzes the loan
portfolio, charge-offs, and allowance on a quarterly basis.  Management then
discusses the development and calculation of this critical accounting estimate
with the executive committee of the Board of Directors. Horizon's audit
committee also reviews the Corporation's disclosures including this critical
accounting estimate.

    Management reviewed and evaluated the loan portfolio and the adequacy of
the allowance at March 31, 2007 and believes that the allowance at 1.51% of
net loans, or $15.9 million is adequate yet not excessive for the risk
inherent in the loan portfolio and the current economic environment.  The
allowance was 1.54% of net loans or $14.2 million at March 31, 2006.  In
fiscal 2007, the loan portfolio grew 14.8% to $1.1 billion at March 31, 2007
from $919.0 million at March 31, 2006.  The loan portfolio has experienced
substantial growth especially in construction and land development loans. At
March 31, 2007, construction and land development loans totaled $405.3
million, an increase of $142.9 million from $262.4 million at March 31, 2006.
The increase in the allowance is primarily attributable to the substantial
growth in this higher risk portion of the loan portfolio. The Bank's Allowance
for Loan and Lease Losses ("ALLL") analysis also considered the potential
impacts of sub-prime loans originated by others in the Bank's markets in
recent years.  These loans are cited as contributing to the slowdowns in the
housing markets across the country.  As homeowner's face significant increases
in their housing payments when these sub-prime loans reset, this will have
potential adverse affects on the economy with an increasing supply of housing
units on the market.  It is predicted that these adverse impacts will result
in increased numbers of houses listed for sale (for those facing unaffordable
increases in their monthly housing payments) and it will also likely increase
the number of foreclosures on residential units.  This sub-prime impact is in
its early stages and a significant amount of uncertainty remains (and will
likely remain for some time until the actual impacts can be better
quantified).

    Economic data from the Federal Reserve showed a slowdown in overall
economic activity in recent quarters.  Evidence of a slowing housing market
exists in the Bank's primary markets as well (Whatcom, Skagit, Snohomish and
Pierce Counties) with the housing inventories increasing from previous year
levels in each market (based on number of months of housing inventories).

                                         40

<PAGE>



    In June 2006, The Federal Reserve's Open Market Committee raised its Fed
Funds target to its current level of 5.25%.  This was the latest increase in a
24 month tightening cycle, which began with a quarter point increase in June
2004 (to a level of 1.25% at that time).  These increases have a lag effect,
which are still filtering through the economy.

    The factors discussed above led management to increase the allowance to
its current levels.

    The Bank recorded net charge-offs of $145,000, $158,000, $55,000, $300,000
and $121,000 during the years ended March 31, 2007, 2006, 2005, 2004 and 2003,
respectively.  Consumer loans (including home equity) totaled $49.6 million or
4.7% of the net loan portfolio at March 31, 2007.  Visa card loans and
unsecured consumer loans accounted for the majority of the Bank's charge-offs.

    The provision for loan losses has fluctuated depending on the growth and
mix of the loan portfolio and the level of charge-offs.  The provision for
loan losses was $1.9 million, $2.6 million, $1.7 million, $1.9 million and
$2.7 million for the fiscal years ended 2007, 2006, 2005, 2004 and 2003,
respectively.

Critical Accounting Policies
----------------------------

    The Corporation's significant accounting principles are described in Note
1 of the Notes to Consolidated Financial Statements included in Item 8 of this
Form 10-K and are essential to understanding Management's Discussion and
Analysis of Financial Condition and Results of Operations.  The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions which affect the reported amounts and disclosures.  Actual results
may differ from these estimates under different assumptions or conditions.
The following policies involve a higher degree of judgment than do our other
significant accounting policies detailed in Note 1 of the Notes to
Consolidated Financial Statements.

    Allowance for Loan Losses.  The Corporation reviews historical origination
and charge-off relationships, charge-off experience factors, collection data,
delinquency reports, estimates of the value of the underlying collateral,
economic conditions and trends and other information in order to make the
necessary judgments as to the appropriateness of the provision for loan losses
and the allowance for loan losses.  Loans are charged-off to the allowance for
loan losses when the Corporation repossesses and disposes of the collateral or
the account is otherwise deemed uncollectible.  The Corporation believes that
the allowance for loan losses is adequate yet not excessive to cover probable
losses inherent in its loan portfolio; however, because the allowance for loan
losses is based on estimates, there can be no assurance that the ultimate
charge-off amount will not exceed such estimates.

    Investments.  The Corporation classifies its investments as either
available-for-sale or held-to-maturity.  Available for sale securities are
reported at their fair value, which is determined by obtaining quoted market
prices.  Unrealized gains and losses on available for sale securities are
included in other comprehensive income and excluded from earnings.  Realized
gains and losses and declines in fair value determined to be other than
temporary are included in earnings.  The fair value of investments is
discussed in more detail in Notes 3 and 4 of the Notes to Consolidated
Financial Statements included in Item 8 of this Form 10-K.

    Long-Lived Assets and Intangibles.  The Corporation periodically assesses
the impairment of its long-lived assets and intangibles using judgment as to
the effects of external factors, including market conditions.  If actual
external conditions and future operating results differ from the Corporation's
judgments, impairment charges may be necessary to reduce the carrying value of
these assets to the appropriate market value.

    Accrued Taxes.  The Corporation estimates tax expense based on the amount
it expects to owe various tax authorities.  Taxes are discussed in more detail
in Note 10 of the Notes to Consolidated Financial Statements included in Item
8 of this Form 10-K.  Accrued taxes represent the net estimated amount due or
to be received from taxing authorities.  In estimating accrued taxes,
management assesses the relative merits and risks of the appropriate tax
treatment of transactions taking into account statutory, judicial and
regulatory guidance in the context of the Corporation's tax position.

                                       41

<PAGE>



Comparison of Financial Condition at March 31, 2007 and March 31, 2006
----------------------------------------------------------------------

    Total consolidated assets for the Corporation as of March 31, 2007, were
$1.3 billion, a 13.8% increase from the March 31, 2006 level of $1.1 billion.
This increase in assets was primarily attributable to the growth in loans
receivable to $1.1 billion at March 31, 2007 from $918.5 million at March 31,
2006.  The growth in loans receivable was primarily attributable to a $142.9
million, or 54.5%, increase in construction and land development loans since
March 31, 2006.  The Bank continued its focus on expanding its relationships
with established residential real estate developers and one-to-four family
residential builders, which resulted in the continued growth in this component
of loans receivable during the period.  Also increasing during the period is
the commercial loan category, as the Bank continues to focus on increasing its
commercial lines of credit balances to diversify its loan portfolio and expand
its relationships with businesses in its markets.  Commercial real estate
loans, primarily consisting of loans with initial fixed rate periods of three
to five years, declined during the period as the Bank continued its trend away
from the lower returns available in this segment in favor of the returns
available in the construction and land development category.  One-to-four
family mortgage loans increased slightly during the period.  The Bank
continued its practice of selling most of its single-family fixed rate loan
production into the secondary market.  The Bank sold $83.0 million of real
estate loans during fiscal year ended March 31, 2007, compared to $103.7
million during the fiscal year ended March 31, 2006, due to an overall decline
in activity from the Bank's single family mortgage division.

    The following is an analysis of the loan portfolio by major type of loan
at March 31, 2007 and 2006.

                                                        At March 31,
                                               -----------------------------
                                                  2007            2006
                                                --------         ------
                                                  (Dollars in thousands)
First mortgage loans:
 One-to-four family........................... $  149,885       $148,515
 One-to-four family construction..............     28,576         20,971
 Less participations sold.....................    (54,592)       (56,546)
                                               ----------       --------
    Subtotal..................................    123,869        112,940

 Construction and land
  development.................................    405,348        262,358
 Residential commercial
  real estate.................................     52,727         70,080
 Nonresidential commercial real
  estate......................................    292,212        314,299
 Commercial loans.............................    146,265        123,445
 Home equity secured..........................     45,307         44,001
 Other consumer loans.........................      5,031          5,571
                                               ----------       --------
   Subtotal...................................    946,890        819,754
                                               ----------       --------
   Total loans receivable.....................  1,070,759        932,694
                                               ----------       --------
Less:
 Allowance for loan losses....................    (15,889)       (14,184)
                                               ----------       --------
   Total loans receivable, net................ $1,054,870       $918,510
                                               ==========       ========

Net residential loans......................... $  122,839  12%  $111,967  12%
Net commercial loans..........................    143,604  13    121,117  13
Net commercial real estate loans (1)..........    738,861  70    636,657  70
Net consumer loans (2)........................     49,566   5     48,769   5
                                               ---------- ----  -------- ----
                                               $1,054,870 100%  $918,510 100%
                                               ========== ====  ======== ====
(1) Includes construction and development, multi-family and commercial real
    estate loans.
(2) Includes home equity and other consumer loans.

                                        42

<PAGE>



    As reflected in the table above, approximately 38% of our total loan
portfolio consists of construction and land development loans and 33% are in
commercial real estate loans.  These types of lending afford the Bank an
opportunity to receive interest at rates higher than those generally available
from one-to-four family residential lending.  These loans, however, also
typically are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one-to-four family
residential mortgage loans.  Because payments on loans secured by commercial
real estate often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in
the real estate market or the economy.  The Bank seeks to minimize these risks
by limiting the maximum loan-to-value ratio to 80% and carefully reviewing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan.

   Construction and land development lending generally involves a higher
degree of risk than permanent financing for a finished residence or commercial
building, because of the inherent difficulty in estimating both the estimated
cost of the project and the property's value at completion.  If the estimated
cost of construction proves to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to complete the project.
To address this risk, and because of the level of construction loans in the
Bank's portfolio, the Bank has personnel dedicated specifically to monitoring
the progress of its construction projects, and making on-site inspections of
the property.  In addition, in an effort to monitor the available inventory in
its markets, the Bank also regularly reviews the overall building and
development activity in its markets.  Also, to mitigate the risks related to
construction lending, the Bank primarily deals with experienced builders, with
acceptable credit histories, sound financial statements, and a proven track
record in the industry.  In addition, the Bank utilizes the services of
experienced inspectors to monitor the progress and draw process in the more
complex construction projects.  The Bank also has an experienced appraisal
staff, and members of senior management with related appraisal education and
experience, who regularly review the appraisals utilized by the Bank in
analyzing prospective construction projects.  Finally, members of the Bank's
senior management and loan committees also have a significant amount of
experience in the areas of construction lending, appraisals, and loan
underwriting, further mitigating the Bank's risk in this area.

    The Bank actively originates construction loans through both its Mortgage
Loan Division and its Commercial Loan Division.  The Bank's Mortgage Loan
Division generally oversees the single family custom construction loans, and
to a lesser extent, speculative construction loans (i.e., loans for homes that
do not have a contract with a buyer for the purchase of the home upon
completion of the construction) to smaller contractors building a limited
number of speculative homes per year.  These construction loans are further
broken down in the first two lines of the table below (speculative
construction one-to-four family and custom construction one-to-four family).
The Bank's Commercial Lending Division is responsible for the speculative
construction projects for the Bank's larger builders (including large
one-to-four family developments), in addition to the Bank's multi-family
construction loans, non-residential commercial construction loans, and the
Bank's land development loans.

                                       43

<PAGE>



    The following table is provided to show additional details on the
Corporation's construction and land development loan portfolio:


                                   March 31, 2007          March 31, 2006
                               --------------------     ------------------
                                 Amount     Percent      Amount    Percent
                               ----------  --------     --------  --------
                                          (Dollars in thousands)
Speculative construction
 one-to-four family...........  $ 13,694      3.2%      $  8,675     3.1%

Custom construction
 one-four-family..............    14,882      3.4         12,296     4.3
                                --------    -----       --------   -----
 Total one-to-four family.....    28,576      6.6         20,971     7.4
Commercial speculative
 construction one-to-four
 family.......................   177,602     40.9         95,534    33.7
Commercial construction
 multi-family.................     6,986      1.6          6,927     2.4
Commercial construction
 nonresidential...............    84,417     19.5         56,328    19.9
Land development..............   136,343     31.4        103,569    36.6
                                --------    -----       --------   -----
 Total construction and land
  development.................   405,348     93.4        262,358    92.6
                                --------    -----       --------   -----
  Total construction loans....  $433,924    100.0%      $283,329   100.0%
                                ========    =====       ========   =====

    The tables below display the characteristics of the available for sale and
held to maturity portfolios at March 31, 2007:

                                                    At March 31, 2007
                                          ------------------------------------
                                                       Unrealized
                                          Amortized       Gain/     Estimated
                                             Cost        (Loss)     Fair Value
                                          -----------  ----------- -----------
Available For Sale Securities
 State and political subdivisions
  and U.S. government agency
  securities............................    $41,350     $  (242)     $41,108
 Marketable equity securities...........        323       5,559        5,882
 Mutual funds...........................      5,000        (126)       4,874
 Corporate debt securities..............      1,002          (1)       1,001
 Mortgage-backed securities and CMOs....     26,220          13       26,233
                                            -------     -------      -------
  Total available-for-sale securities...     73,895       5,203       79,098
                                            -------     -------      -------
Held To Maturity Securities
 State and political subdivisions
  and U.S. government agency
  securities............................        370           2          372
 Mortgage-backed securities and CMOs....        148           9          157
                                            -------     -------      -------
  Total held to maturity securities.....        518          11          529
                                            -------     -------      -------
  Total securities......................    $74,413     $ 5,214      $79,627
                                            =======     =======      =======

                                              44

<PAGE>



                                          Maturity Schedule of Securities
                                                at March 31, 2007
                                  --------------------------------------------
                                    Available For Sale      Held To Maturity
                                  ---------------------  ---------------------
                                  Amortized  Estimated   Amortized  Estimated
                                     Cost    Fair Value     Cost    Fair Value
                                  ---------- ----------  ---------  ----------
                                                   (In thousands)
Maturities:
 Less than one year.............    $23,870    $23,780     $     4     $     4
 Over one year to five years....     11,294     11,157         488         491
 Over five to ten years.........     10,863     10,856          16          23
 Over ten years.................     22,545     22,549          10          11
                                    -------    -------     -------     -------
                                     68,572     68,342         518         529
                                    -------    -------     -------     -------
Mutual funds and marketable
 equity securities..............      5,323     10,756          --          --
                                    -------    -------     -------     -------
  Total investment securities...    $73,895    $79,098     $   518     $   529
                                    =======    =======     =======     =======

    Total liabilities also increased 14.3% to $1.1 billion at March 31, 2007,
from $1.0 billion at March 31, 2006.  This increase was the result, in large
part, of growth in deposits, which increased 16.9% to $975.3 million at March
31, 2007 from $834.3 million at March 31, 2006.  The following is an analysis
of the deposit portfolio by major type of deposit at March 31, 2007 and 2006:

                                                       At March 31,
                                                   --------------------
                                                     2007         2006
                                                   --------    --------
                                                        (In thousands)
           Demand Deposits
            Savings............................... $ 21,628    $ 30,808
            Checking..............................   78,294      79,774
            Checking (noninterest-bearing)........   91,703      80,778
            Money Market..........................  187,912     156,867
                                                   --------    --------
                                                    379,537     348,227
                                                   --------    --------
           Time certificates of deposit
            Less than $100,000....................  273,022     246,136
            Greater than or equal to $100,000.....  322,736     239,936
                                                   --------    --------
                                                    595,758     486,072
                                                   --------    --------
            Total deposits........................ $975,295    $834,299
                                                   ========    ========

    Also included in the March 31, 2007 balance sheet is an investment in real
estate for a joint venture and the corresponding borrowing.  During the year
ended March 31, 2005, the Bank's subsidiary (Westward Financial Services), as
a 50% partner in the Greenbriar NW LLP (GBNW), purchased an 85 acre parcel of
land  in Bellingham, Washington for future residential development.  GBNW
intends to develop the property in  future years, into a neighborhood
community to be known as Fairhaven Highlands.   The $17.2 million shown on the
Corporation's balance sheet as an asset at March 31, 2007 represents the
current level of the investment in real estate joint ventures, including the
Fairhaven Highlands joint venture.  This amount also includes the remaining
net investment in other residential development joint ventures.  The $20.2
million shown in the liability section of the balance sheet represents the
corresponding wholesale borrowing used to fund the investment in the Fairhaven
Highlands joint venture, which includes costs that have been incurred and
capitalized since the acquisition of the property.  At this time, the
partnership is in the process of meeting with the appropriate public and
private entities, in its preliminary planning efforts relating to the future
development of the property.

                                         45

<PAGE>



    Stockholders' equity at March 31, 2007 increased 9.3% to $123.9 million
from $113.3 million at March 31, 2006.  This increase was primarily
attributable to the increase in net income to $19.0 million at March 31, 2007
from $15.7 million at March 31, 2006.  This change includes the effects of the
$6.1 million in dividends paid to stockholders and the Corporation's share
repurchase program.  The Corporation repurchased shares totaling $2.9 million
during the year ended March 31, 2007 compared to $4.4 million for the year
ended March 31, 2006.  The Corporation remains strong in terms of its capital
position, with a stockholder equity-to-assets ratio of 9.8% at March 31, 2007,
compared to 10.2% at March 31, 2006.

Comparison of Operating Results for the Years Ended March 31, 2007 and March
31, 2006
----------------------------------------------------------------------------

    Net Interest Income.  Net interest income in fiscal 2007 was $52.5
million, a 17.9% increase from $44.5 million in fiscal 2006.  Total interest
income increased 33.5% in fiscal 2007 to $92.6 million from $69.4 million in
fiscal 2006.

    Interest income on loans in fiscal 2007 was $88.6 million, a 34.5%
increase from $65.9 million in fiscal 2006.  The increase in fiscal 2007 was
as a result of a combination of factors, including:  1) the growth in loans
receivable, as the Bank experienced significant loan growth during the year,
increasing to $1.1 billion at March 31, 2007, compared to $918.5 million at
March 31, 2006; and 2) an increasing Prime lending rate throughout the fiscal
year.  With a portfolio of Prime based loans in excess of $450 million
throughout the year ($605.5 million at March 31, 2007) each quarter point
increase in the Prime lending rate equated to an annualized increase in
interest income on those types of loans of over $1.0 million.  The Prime
lending rate   increased to 8.25% in June 2006, where it remained at March 31,
2007, compared to 7.75% at March 31, 2006.

    Also included in interest income for the year ended March 31, 2007 and
2006 were approximately $4.8 million and $3.5 million, respectively, of
deferred fee income recognition.  In fiscal 2007 and 2006, most of these fees
were related to the Bank's commercial loan portfolio, that resulted in large
part from the success in increasing the real estate development loan
portfolio.  These development loans typically are shorter term in nature, so
the deferred fee recognition during the life of the loan is greater than what
would be recognized for a comparable loan fee on a longer amortizing loan.
The table below presents an analysis of deferred fee recognition for the past
two fiscal years:

                                                    Year Ended March 31,
                                                   ----------------------
                                                      2007        2006
                                                   ---------    ---------
                                                       (In thousands)

    Commercial loan deferred fees.................  $  4,076     $  2,960
    One-to-four real estate mortgage loan
      deferred fees...............................       684          519
                                                    --------     --------
      Total.......................................  $  4,760     $  3,479
                                                    ========     ========

    Interest and dividends on investments and mortgage-backed securities was
$4.0 million in fiscal 2007, a 13.6% increase from $3.5 million in fiscal
2006.  Contributing to this increase was the restructuring of approximately
$13.0 million of the investment securities portfolio during the quarter ended
March 31, 2006.  The proceeds from those lower-yielding securities were
reinvested in highly rated, higher-yielding investments.  Also contributing to
the change in fiscal 2007 was a reduction in dividend income on the Bank's
FHLB stock.  At March 31, 2007, Horizon Bank held $7.2 million in FHLB of
Seattle stock and received dividends in the amounts of $14,500 in fiscal 2007
compared to $29,500 in fiscal 2006. The FHLB of Seattle has been operating
under a regulatory directive since May 2005.  In December 2006, the FHLB of
Seattle announced that quarterly cash dividends would resume with payment of a
cash dividend in December 2006.  On January 29, 2007, the FHLB of Seattle
declared a similar dividend ($0.10 per share), payable in February 2007.
Subsequently, on May 2, 2007, the FHLB announced a cash dividend of $0.15 per
share, payable May 18, 2007.  The Bank's stock ownership in the FHLB of
Seattle is expected to remain stable, increasing only if necessary to support
its borrowing needs.  The FHLB of Seattle also revised its  requirements
related to borrowings outstanding and stock levels required to support
borrowings, and, therefore, the Bank's existing level of FHLB stock will

                                      46

<PAGE>



support a higher level of wholesale borrowings, decreasing the likelihood that
the Bank will need to purchase additional stock to support its borrowing
activities.

    Total interest expense in fiscal 2007 increased 61.2% to $40.1 million
from $24.9 million in fiscal 2006.  Interest on deposits increased
significantly to $32.3 million in fiscal 2007 from $20.0 million in fiscal
2006.  Also contributing to the increase was the increasing level of interest
rates during the year which resulted in an increase in interest expense,
including interest paid on the Bank's deposits.  At March 31, 2007,
approximately 61% of the Bank's deposits were in the form of certificates of
deposit, including $79.4 million in brokered certificates of deposit.  As
such, an increasing interest rate environment affects the Bank's deposit
interest expense more dramatically than if a larger portion of the Bank's
funding were in the form of lower cost checking and liquid savings accounts.
While management continues its efforts to decrease its reliance on
certificates of deposit as a funding source, the competitive marketplace for
core deposit dollars has resulted in only moderate success in this regard.
During fiscal 2007, the Bank's increase in deposit interest expense lagged the
increase in its interest income on loans (in dollar terms).  This was the
result, in large part, to the immediate impact to interest income from the
Bank's Prime based loan portfolio (with each increase in the Prime lending
rate), and the lagged effect of increased interest expense on certificates of
deposit, since these certificate of deposit rate increases do not occur
instantaneously, instead lagging until the maturity of the certificate of
deposit.  In addition, even if current market interest rates were not
increasing, the Bank's interest on deposits would continue to increase, since
the current prevailing market rates to attract deposits are higher than the
rates being paid on its renewing deposits.

    Interest on borrowings increased to $7.9 million in fiscal 2007 from $4.9
million in fiscal 2006. The increase was a result of a higher level of average
borrowings outstanding during the year ended March 31, 2007 of $166.3 million
compared to $127.3 million during the year ended March 31, 2006 along with the
increasing interest rate environment in fiscal 2007.  The significant increase
in fiscal 2007 was related to funding the Bank's loan growth during the year.
The vast majority of this borrowing growth was in short term borrowings,
consistent with the shorter term, Prime based loan growth the Bank experienced
during the year.  The Bank continues to utilize wholesale borrowings in order
to further leverage its balance sheet and better manage its interest rate risk
profile.

    Provision for Loan Losses.  Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, based on management's continuing analysis of factors underlying the
quality of the loan portfolio.  These factors include changes in portfolio
size and composition, actual historical industry loss experience, current
economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans.

                                                      Year Ended March 31,
                                                  ---------------------------
                                                    2007     2006       2005
                                                  --------  -------  --------
                                                    (Dollars in thousands)

       Allowance at beginning of period..........  $14,184  $11,767  $ 10,122
       Provision for loan losses.................    1,850    2,575     1,700
       Charge offs, net of recoveries............     (145)    (158)      (55)
                                                  --------  -------  --------
       Allowance at end of period................  $15,889  $14,184  $ 11,767
                                                  ========  =======  ========
       Allowance for loan losses as a percentage
        of net loans receivable at the end of
        the period...............................     1.51%    1.54%     1.46%

       Net charge-offs as a percentage of average
        loans outstanding during the period......     0.01%    0.02%     0.01%

       Allowance for loan losses as a percentage
        of nonperforming assets at the end
        of period................................  1670.06% 1221.35%  794.53%


                                            47

<PAGE>



    The provision for loan losses was $1.9 million for the year ended March
31, 2007 compared to $2.6 million for the year ended March 31, 2006.  This
change resulted from management's ongoing analysis of changes in loan
portfolio composition by collateral categories, overall credit quality of the
portfolio, peer group analysis, and current economic conditions.  The
allowance for loan losses was $15.9 million, or 1.51% of net loans receivable
at March 31, 2007 compared to $14.2 million, or 1.54% of net loans receivable
at March 31, 2006.  The increased allowance level resulted from continued loan
portfolio growth in the higher-risk lending categories of construction and
land development, commercial real estate and commercial business loans during
the period, which comprised $896.6 million, or 83.7% of total loans receivable
at March 31, 2007, versus $770.2 million, or 82.6% at March 31, 2006.

    In addition, commercial and multi-family loans have larger individual loan
amounts, which have a greater single impact on the total portfolio quality in
the event of delinquency or default.  The Corporation considers the allowance
level to be appropriate, as a result of the changing portfolio mix and the
current economic environment. 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 significantly increase
or decrease 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 elsewhere in this
document.  Any material increase in the allowance for loan losses may
adversely affect the Bank's financial condition and results of operations.

    As of March 31, 2007, there were no loans in the loan portfolio over 90
days delinquent and five loans on non- accrual status.  The Bank had one real
estate owned at March 31, 2007. Total non-performing assets were $951,000, or
0.07% of total assets at March 31, 2007 compared to $1.2 million, or 0.10% of
total assets at March 31, 2006.

                                                        At March 31,
                                                    --------------------
                                                     2007         2006
                                                    -------     --------
                                                    (Dollars in thousands)
        Non-Performing Assets
         Accruing loans-90 days past due..........   $   --     $     --
         Non-accrual loans........................      226        1,161
         Restructured loans.......................       --           --
                                                    -------     --------
          Total non-performing loans..............      226        1,161
          Total non-performing loans/net loans....     0.02%        0.13%
         Real estate owned........................      725           --
                                                    -------     --------
          Total non-performing assets.............      951        1,161
                                                    -------     --------
          Total non-performing assets/total
           assets.................................     0.07%        0.10%

    Noninterest Income.  Noninterest income in fiscal 2007 increased to $5.8
million, from $5.4 million in fiscal 2006.  Service fees increased 12.7% to
$3.3 million in fiscal 2007 from $2.9 million in fiscal 2006.  The primary
reason for this increase was the implementation of our overdraft protection
service during fiscal 2006, which, together with the increase in deposits,
resulted in increased fee income.

    There was a net loss on sales of investment securities of $(10,000) in
fiscal 2007 compared to a net loss of $(476,000) in fiscal 2006.  The losses
in fiscal 2007 were a result of management's decisions to replace certain
investment securities during the year in its efforts to improve future
returns.  The losses in fiscal 2006 were a result of the restructuring of
approximately $13.0 million of lower-yielding securities during the fourth
quarter of fiscal 2006.  The proceeds from these sales have since been
reinvested in highly rated, higher-yielding investments.  The securities sold
were yielding approximately 170 basis points lower than the securities
purchased, therefore the effect of this restructuring was to increase interest
income from these securities by over $220,000 in fiscal 2007.  Other
noninterest income decreased slightly to $1.7 million for the year ended March
31, 2007 from $1.9 million for the year ending March 31, 2006.

                                        48

<PAGE>



    Noninterest Expense.  Noninterest expense in fiscal 2007 increased to
$27.9 million, a 12.5% increase from $24.8 million in fiscal 2006.
Compensation and employee benefits increased 11.7% in fiscal 2007 to $16.3
million from $14.6 million in fiscal 2006.  Building occupancy expense was
$4.3 million in fiscal 2007, a 19.7% increase from $3.6 million in fiscal
2006.  Increases in compensation and employee benefits and building and
occupancy expenses resulted primarily from the opening of a full service
retail office in Lakewood, Washington in fiscal 2006 and a full service
regional facility in Everett, Washington in June 2006.

    Other noninterest expenses increased 13.4% to $5.6 million in fiscal 2007
from $5.0 million in fiscal 2006.  The increase in fiscal 2007 was primarily
attributable to additional transfer agent and investor relations expenses, and
increased business & occupation tax as a result of the shifting loan portfolio
from non-taxable mortgage loans to taxable commercial loans.

Comparison of Operating Results for the Years Ended March 31, 2006 and March
31, 2005
----------------------------------------------------------------------------

    Net Interest Income.  Net interest income in fiscal 2006 was $44.5
million, a 23.5% increase from $36.0 million in fiscal 2005.  Total interest
income increased 33.0% in fiscal 2006 to $69.4 million from $52.2 million in
fiscal 2005.

    Interest income on loans in fiscal 2006 was $65.9 million, a 23.5%
increase from $48.1 million in fiscal 2005.  The increase in fiscal 2006 was
as a result of a combination of factors, including:  1) the growth in loans
receivable, as the Bank experienced significant loan growth during the year,
increasing to $918.5 million at March 31, 2006, compared to $805.0 million at
March 31, 2005; and 2) an increasing Prime lending rate throughout the fiscal
year.  With a portfolio of Prime based loans in excess of $400 million
throughout the year ($444.9 million at March 31, 2006) each quarter point
increase in the Prime lending rate equated to an annualized increase in
interest income on those types of loans of over $1.0 million.  The Prime
lending rate increased to 7.75% at March 31, 2006, compared to 5.75% at March
31, 2005.

    Also included in interest income for the year ended March 31, 2006 and
2005 were approximately $3.5 million and $2.6 million, respectively, of
deferred fee income recognition.  In fiscal 2006 and 2005, most of these fees
were related to the Bank's commercial loan portfolio, that resulted in large
part to the success in increasing  the real estate development loan portfolio.
These development loans typically are shorter term in nature, so the deferred
fee recognition during the life of the loan is greater than what would be
recognized for a comparable loan fee on a longer amortizing loan.  The table
below presents an analysis of deferred fee recognition for the past two fiscal
years:

                                                   Year Ended March 31,
                                                  ----------------------
                                                    2006         2005
                                                  ---------    ---------
                                                      (In thousands)

    Commercial loan deferred fees................  $  2,960     $  1,793
    One-to-four real estate mortgage loan
     deferred fees...............................       519          813
                                                   --------     --------
     Total.......................................  $  3,479     $  2,606
                                                   ========     ========

    Interest and dividends on investments and mortgage-backed securities was
$3.5 million in fiscal 2006, a 12.8% decrease from $4.1 million in fiscal
2005.  This decrease was attributable to lower levels of investments and
mortgage-backed securities outstanding during the respective periods, as
average total investments decreased 17.5% to $92.2 million at March 31, 2006
compared to $111.8 million at March 31, 2005. The decline in the investment
portfolio balances in these years was primarily attributable to the funding of
the Bank's lending activities. To enhance the Bank's profitability, management
chose to direct its available funds to fund loans receivable, in lieu of
purchasing securities for its investment portfolio.  Also contributing to the
decline in fiscal 2006 was a reduction in dividend income on the Bank's FHLB
stock.  At March 31, 2006, Horizon Bank held $7.2 million in FHLB of Seattle
stock and received dividends in the amounts of $29,500 in fiscal 2006 compared
to $162,800 in fiscal 2005. The FHLB of Seattle announced that, despite the
dividend paid to shareholders on March 31, 2005, it had indefinitely suspended
the payment of dividends.  The FHLB of Seattle is operating under a regulatory
directive and in April 2005 announced that all future dividends would be


                                          49

<PAGE>



suspended until its financial position and performance improves. On May 18,
2005, the FHLB of Seattle announced a three-year dividend suspension;
therefore, the Bank's investment income will be reduced accordingly over this
time period.  Stock ownership in the FHLB of Seattle is expected to remain
stable, increasing only if necessary to support the Bank's borrowing needs.
The FHLB of Seattle recently revised its stock requirement related to
borrowings outstanding, therefore the Bank's existing level of FHLB stock will
support a higher level of wholesale borrowings, decreasing the likelihood that
the Bank will need to purchase additional stock to support its borrowing
activities.

    Total interest expense in fiscal 2006 increased 54.2% to $24.9 million
from $16.1 million in fiscal 2005.  Interest on deposits increased
significantly to $20.0 million in fiscal 2006 from $13.2 million in fiscal
2005. As discussed in the paragraphs above, the increasing level of interest
rates during the year resulted in an increase in interest income, however, it
also caused an increase in interest expense, including interest paid on the
Bank's deposits.  At March 31, 2006, approximately 58% of the Bank's deposits
were in the form of certificates of deposit, including $52.9 million in
brokered certificates of deposit.  As such, an increasing interest rate
environment affects the Bank's deposit interest expense more dramatically than
if a larger portion of the Bank's funding were in the form of lower cost
checking and liquid savings accounts.  While management continues its efforts
to decrease its reliance on certificates of deposit as a funding source, the
competitive marketplace for core deposit dollars has resulted in only moderate
success in this regard.  During fiscal 2006, the Bank's increase in deposit
interest expense lagged the increase in its interest income on loans (in
dollar terms).  This was the result, in large part, to the immediate impact to
interest income from the Bank's Prime based loan portfolio (with each increase
in the Prime lending rate), and the lagged effect of increased interest
expense on certificates of deposit, since these certificate of deposit rate
increases do not occur instantaneously, instead lagging until the maturity of
the certificate of deposit.  In addition, even if interest rates were not
increasing, the Bank's interest on deposits would continue to increase, as
long as the prevailing market rates to attract deposits are higher than the
rates being paid on its renewing deposits.

    Interest on borrowings increased to $4.9 million in fiscal 2006 from $2.9
million in fiscal 2005. The increase was a result of a higher level of
borrowings outstanding during the year ended March 31, 2006 of $159.8 million
compared to $135.8 million during the year ended March 31, 2005 along with the
increasing interest rate environment in fiscal 2006.  The significant increase
in fiscal 2006 was related to funding the Bank's significant loan growth
during the year.  The vast majority of this borrowing growth was in short term
borrowings, consistent with the shorter term, Prime based loan growth the Bank
experienced during the year.  The Bank continues to utilize wholesale
borrowings in order to further leverage its balance sheet and better manage
its interest rate risk profile.

    Provision for Loan Losses.  Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for known and inherent risks in the loan
portfolio, based on management's continuing analysis of factors underlying the
quality of the loan portfolio.  These factors include changes in portfolio
size and composition, actual historical industry loss experience, current
economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans.


                                        50

<PAGE>



                                                     Year Ended March 31,
                                                    ----------------------
                                                     2006           2005
                                                    --------      --------
                                                    (Dollars in thousands)

       Allowance at beginning of period..........   $ 11,767      $ 10,122
       Provision for loan losses.................      2,575         1,700
       Charge offs, net of recoveries............       (158)          (55)
                                                    --------      --------
       Allowance at end of period................   $ 14,184      $ 11,767
                                                    ========      ========
       Allowance for loan losses as a percentage
        of net loans receivable at the end of
        the period...............................       1.54%         1.46%

       Net charge-offs as a percentage of average
        loans outstanding during the period......       0.02%         0.01%

       Allowance for loan losses as a percentage
        of nonperforming assets at the end
        of period................................    1221.35%       794.53%

    The provision for loan losses was $2.6 million for the year ended March
31, 2006 compared to $1.7 million for the year ended March 31, 2005.  This
change resulted from management's ongoing analysis of changes in loan
portfolio composition by collateral categories, overall credit quality of the
portfolio, peer group analysis, and current economic conditions.  The
allowance for loan losses was $14.2 million, or 1.54% of net loans receivable
at March 31, 2006 compared to $11.8 million, or 1.46% of  net loans receivable
at March 31, 2005.  The increased allowance level resulted from continued loan
portfolio growth in the higher-risk lending categories of construction and
land development, commercial real estate and commercial business loans during
the period, which comprised $770.2 million, or 82.6% of total loans receivable
at March 31, 2006, versus $658.2 million, or 80.6% at March 31, 2005.

    In addition, commercial and multi-family loans have larger individual loan
amounts, which have a greater single impact on the total portfolio quality in
the event of delinquency or default.  The Corporation considers the allowance
level to be appropriate, as a result of the changing portfolio mix and the
current economic environment.

    As of March 31, 2006, there were no loans in the loan portfolio over 90
days delinquent and nine loans on non- accrual status.  The Bank had no real
estate owned at March 31, 2006. Total non-performing assets were $1.2 million,
or 0.10% of total assets at March 31, 2006 compared to $1.5 million, or 0.15%
of total assets at March 31, 2005.

                                                            At March 31,
                                                        --------------------
                                                          2006        2005
                                                        --------     -------
                                                       (Dollars in thousands)
       Non-Performing Assets
        Accruing loans-90 days past due................  $    --     $    --
        Non-accrual loans..............................    1,161       1,481
        Restructured loans ............................       --          --
                                                         -------     -------
         Total non-performing loans....................    1,161       1,481
         Total non-performing loans/net loans..........     0.13%       0.18%
        Real estate owned..............................       --          --
                                                         -------     -------
         Total non-performing assets...................    1,161       1,481
                                                         -------     -------
         Total non-performing assets/total assets......     0.10%       0.15%

    Noninterest Income.  Noninterest income in fiscal 2006 decreased slightly
to $5.4 million, from $5.7 million in fiscal 2005.  Service fees increased
22.9% to $2.9 million in fiscal 2006 from $2.4 million in fiscal 2005.  The
primary reason for this increase was the implementation of our overdraft
protection service during July 2005, which, together with the increase in
deposits, resulted in increased fee income.

                                          51

<PAGE>



    There was a net loss on sales of investment securities of $(476,000) in
fiscal 2006 compared to a net gain of $476,000 in fiscal 2005.  The losses in
fiscal 2006 were a result of the restructuring of approximately $13.0 million
of lower-yielding securities during the fourth quarter of fiscal 2006.  The
proceeds from these sales have since been reinvested in highly rated,
higher-yielding investments.  The securities sold were yielding approximately
170 basis points lower than the securities purchased, therefore the effect of
this restructuring is expected to increase interest income from these
securities by over $220,000 in fiscal 2007.  Other noninterest income was
essentially unchanged for the periods ending March 31, 2006 and 2005.
Included in these numbers was the recognition of approximately $300,000 and
$446,000, respectively, in profits on the real estate development project from
a joint venture of the Bank's wholly owned subsidiary, Westward Financial
Corp.  As of March 31, 2006 all lot sales have been concluded for this
project.  As a result of the current status of the development of these lots,
no sales activity is currently anticipated for fiscal 2007 from the Bank's
real estate joint venture activities.

    Noninterest Expense.  Noninterest expense in fiscal 2006 increased to
$24.8 million, a 14.6% increase from $21.6 million in fiscal 2005.
Compensation and employee benefits increased 15.7% in fiscal 2006 to $14.6
million from $12.6 million in fiscal 2005.  Building occupancy expense was
$3.6 million in fiscal 2006, a 20.5% increase from $3.0 million in fiscal
2005.   Increases in compensation and employee benefits and building and
occupancy expenses resulted from the full year operating expenses for two full
service retail offices in Marysville and Lakewood.

    Other noninterest expenses increased 12.3% to $5.0 million in fiscal 2006
from $4.4 million in fiscal 2005.  The increase in fiscal 2006 was primarily
attributable to increased expenses related to the Bank's charter conversion
and increased Businees & Occupation tax attributable to the shifting loan
portfolio from non-taxable mortgage loans to taxable commercial loans.

    Data processing expenses decreased in fiscal 2006 to $887,000 from
$901,000 in fiscal 2005.  Expenses for the year ended March 31, 2005 included
one time conversion related costs related to the Bank's core processor
conversion completed in November 2004.

    Advertising and marketing expenses increased slightly to $720,000 in
fiscal 2006 from $688,000 in fiscal 2005, due in part to increased advertising
expenses to support the Bank's new Marysville and Lakewood offices.  The
decreases in fiscal 2005 were primarily attributable to management's decision
to reduce this expense.  The increases in fiscal 2006 and 2004 were related to
market research and brand positioning of the Bank in its various markets.

                                        52

<PAGE>



<TABLE>

 Average Balances, Interest and Average Yields/Costs
 ---------------------------------------------------

    The following table presents at the date and for the periods indicated, the total dollar amount of
interest income and interest expense, as well as the resulting yields earned and rates paid.

                At March 31,                               Year Ended March 31,
               --------------- ----------------------------------------------------------------------------
                    2007                 2007                      2006                      2005
               --------------- ------------------------  ------------------------  ------------------------
                       Average                   Average                   Average                   Average
                        Yield/ Average           Yield/  Average           Yield/  Average           Yield/
               Balance   Cost  Balance  Interest  Cost   Balance  Interest  Cost   Balance  Interest  Cost
               -------  ------ -------  -------- ------  -------  -------- ------  -------  -------- ------
                                                 (Dollars in thousands)

            <c>      <c>    <c>      <c>      <c>     <c>      <c>      <c>     <c>       <c>     <c>
Interest-earning
assets:
 Loans
 receivable
 (1).........$1,054,870 8.71% $1,017,460 $88,589  8.71%  $862,893  $65,857  7.63%   $718,918  $48,131  6.69%
Investment
 securities
 (2).........    65,861 4.13      64,805   2,678  4.13     70,621    2,556  3.62      89,052    3,227  3.62
Mortgage-backed
 securities..    26,381 4.91      27,150   1,333  4.91     21,573      975  4.52      22,751      824  3.62
              --------- ----   --------- ------- -----   --------  ------- -----    --------   ------  ----
  Total interest-
   earning
   assets.... 1,147,112 8.35   1,109,415  92,600  8.35    955,087   69,388  7.27     830,721   52,182  6.28

Interest-bearing
 liabilities:
 Deposits....   975,295 3.56     906,047  32,251  3.56    787,734   19,988  2.54     689,425   13,219  1.92
 Borrowings..   158,958 4.74     166,276   7,882  4.74    127,284    4,908  2.68      89,820    2,925  3.26
              --------- ----   --------- ------- -----   --------  ------- -----    --------   ------  ----
   Total interest-
    bearing
    liabili-
    ties..... 1,134,253 3.74   1,072,323  40,133  3.74    915,018   24,896  2.70     779,245   16,144  2.07
                                         -------                   -------           -------
Net interest
 income......                            $52,467                   $44,492           $36,038
                                         =======                   =======           =======
Interest rate
 spread......                              4.60%                     4.54%             4.21%
                                         =======                   =======           =======
Net interest
 margin......                              4.73%                     4.66%             4.34%
                                         =======                   =======           =======
Ratio of average
 interest-earning
 assets to average
 interest-bearing
 liabilities.                            103.46%                   104.38%           106.62%
                                         =======                   =======           =======


-------------
(1)    Average balances include nonaccrual loans, if any.  Interest income on nonaccrual loans has been
       included.
(2)    The yield on investment securities is calculated using historical cost basis.

                                                        53
</TABLE>
<PAGE>



Rate/Volume Analysis
---------------------

    The table below sets forth certain information regarding changes in
interest income and interest expense for the Corporation for the periods
indicated.  For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
volume (change in volume multiplied by old rate); (2) changes in rates (change
in rate multiplied by old volume); (3) changes to rate-volume (changes in rate
multiplied by the change in volume); and (4) the total changes (the sum of the
prior columns).


<PAGE>
<TABLE>

                                                                Year Ended March 31,
                                      ----------------------------------------------------------------------
                                                2007 vs. 2006                       2006 vs. 2005
                                      ----------------------------------   ---------------------------------
                                            Increase (Decrease)                  Increase (Decrease)
                                                  Due to                               Due to
                                      ----------------------------------   ---------------------------------
                                                        Rate/                                Rate/
                                      Volume    Rate    Volume    Total    Volume   Rate     Volume   Total
                                      -------  ------   -------  -------   ------  ------   -------  -------
                                                                     (In thousands)

                                  <c>       <c>    <c>     <c>      <c>     <c>     <c>    <c>
Interest income:
 Interest and fees  on loans........ $11,797   $9,274   $1,661   $22,732   $9,615  $6,758   $1,353   $17,726
 Investment securities and other
  interest-bearing securities.......      (9)     490       (1)      480    (714)    235      (41)     (520)
                                     -------   ------   ------   -------   ------  ------   ------   -------
 Total interest-earning assets...... $11,788   $9,764   $1,660   $23,212   $8,901  $6,993   $1,312   $17,206
                                     =======   ======   ======   =======   ======  ======   ======   =======
Interest expense:
 Deposit accounts................... $ 3,002   $8,051   $1,209   $12,262   $1,887  $4,272   $  610   $ 6,769
 Borrowings.........................   1,209    1,417      349     2,975    1,219     539      225    1,983
                                     -------   ------   ------   -------   ------  ------   ------   -------
 Total interest-bearing
   liabilities...................... $ 4,211   $9,468   $1,558   $15,237   $3,106  $4,811   $  835   $ 8,752
                                     =======   ======   ======   =======   ======  ======   ======   =======
</TABLE>



Liquidity and Capital Resources
-------------------------------

    The Bank maintains liquid assets in the form of cash and short-term
investments to provide a source to fund loans, savings withdrawals, and other
short-term cash requirements.  At March 31, 2007, the Bank had liquid assets
(cash and marketable securities with maturities of one year or less) with a
book value of $75.8 million.

    As of March 31, 2007, the total book value of investments and
mortgage-backed securities was $74.4 million compared to a market value of
$79.6 million with an unrealized gain of $5.2 million. As of March 31, 2006,
the total book value of investments and mortgage-backed securities was $79.2
million compared to a market value of $84.4 million with an unrealized gain of
$5.2 million.  The Corporation foresees no factors that would impair its
ability to hold debt securities to maturity.

    As indicated on the Corporation's Consolidated Statement of Cash Flows
contained in Item 8 of this Form 10-K, the Corporation's primary sources of
funds are cash flow from operations, which consist primarily of mortgage loan
repayments, deposit increases, loan sales, borrowings, and cash received from
the maturity or sale of investment securities.  The Corporation's liquidity
fluctuates with the supply of funds and management believes that the current
level of liquidity is adequate at this time.  If additional liquidity is
needed, the Corporation's options include, but are not necessarily limited to:
(i) selling additional loans in the secondary market; (ii) entering into
reverse repurchase agreements; (iii) borrowing from the FHLB of Seattle; (iv)
accepting additional jumbo, brokered, and/or public funds deposits; or (v)
accessing the discount window of the Federal Reserve Bank of San Francisco.

    Stockholders' equity as of March 31, 2007 was $123.9 million, or 9.7% of
assets, compared to $113.3 million, or 10.1% of assets at March 31, 2006.  The
Bank continues to exceed the 5.0% minimum tier one capital required by the
FDIC in order to be considered well-capitalized.  The Bank's total
risk-adjusted capital ratio as of March 31, 2007

                                          54

<PAGE>



was 12.0%, compared to 12.6% as of March 31, 2006.  These figures remain well
above the well-capitalized minimum of 10% set by the FDIC.

    The Corporation has conducted various buy-back programs since August 1996.
In March 2007, the Board of Directors approved a new stock repurchase plan
that runs concurrent with the 2008 fiscal year, allowing the Corporation to
repurchase up to 5% of total shares outstanding, or approximately 600,000
shares.  This marked the Corporation's ninth stock repurchase plan. In fiscal
2007, under the previous plan, the Corporation repurchased 144,580 shares at
an average price of $20.31.  For additional information concerning the
Corporation's repurchase activities during the fourth quarter of fiscal 2007,
see Item 5 of this Form 10-K.

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

Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------

    The Corporation continues to be exposed to interest rate risk.  Currently,
the Corporation's assets and liabilities are not materially exposed to foreign
currency or commodity price risk.  At March 31, 2007, the Corporation had no
off-balance sheet derivative financial instruments, nor did it have a trading
portfolio of investments.

    In fiscal 2007 and fiscal 2006, the Corporation continued to outsource its
interest rate risk modeling to a third party provider that utilizes an IPS
Sendero@ model.  This model analyzes the Corporation's major balance sheet
components, and attempts to estimate the changes to the Corporation's income
statement and economic value of equity, under a variety of interest rate
change scenarios.  The figures contained in the table presented under Item 7A
of this Form 10-K below, in the Quantitative Disclosures About Market Risk
section, were derived from this model.  While numerous assumptions go into
this modeling, and undue reliance should not be placed on the specific
results, management believes that this improved modeling will enhance its
interest rate risk management efforts.

    Similar to the analysis performed one year ago, the current interest rate
risk modeling continues to show the Bank's balance sheet as moderately asset
sensitive over a 12-month time period.  The Bank's continued focus on shorter
term, variable rate assets has contributed to the Bank's performance in this
regard.  This strategy has allowed the Bank to utilize wholesale borrowing and
brokered deposits as a supplemental source of funds to its retail and
commercial deposit gathering efforts, without significantly impacting the
Bank's interest rate risk profile.  In addition, the Bank has been successful
at increasing its demand deposit base in recent years, further enhancing the
Bank's interest rate risk profile.  Accordingly, the interest rate risk
modeling performed each quarter during fiscal 2007 shows that the Bank
continues to operate within the interest rate risk tolerance limits set by its
Board of Directors.

    With the current level of interest rates at March 31, 2007 and the
associated prepayment assumptions in the low-rate environment, interest rate
risk modeling predicts moderate improvement in the Bank's performance in a
moderately higher rate environment over a 12-month time period.  However, as
interest rates increase, prepayment assumptions can change significantly,
therefore it would be inappropriate to assume that significantly higher rates
would have a sustained positive effect on the Bank's and the Corporation's
performance.  Further, an increase in rates, without a corresponding increase
in certain indices (such as Prime), would adversely affect the Corporation's
performance.

    For example, if it becomes necessary for the Corporation to increase the
rates it pays to attract funds in a rising rate environment (as is the case
currently), an absence of a corresponding increase in the Prime lending rate
would, of course, negatively affect performance.  In addition, depending on
timing differences, the magnitude of various rates

                                         55

<PAGE>



change in future periods, and the composition of the Corporation's balance
sheet, future modeling efforts may show the Corporation's returning to a
liability sensitive position.  Management continues to monitor these areas, in
its ongoing effort to manage the Corporation's interest rate risk.

Contractual Obligations
-----------------------

    In the normal course of business, the Corporation enters into contractual
obligations that meet various business needs.  These contractual obligations
include time deposits to customers, borrowings from the FHLB of Seattle and
lease obligations for facilities. See Notes 8, 9 and 14 of the Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K for
additional information.  The following table summarizes the Corporation's
long-term contractual obligations at March 31, 2007:

                              Less than  One to   Three to
                                 One      Three     Five
                                 Year     Years     Years  Thereafter  Total
                              ---------  -------- -------- ---------- --------
                                                 (In thousands)

Time deposits...............   $512,062   $56,545  $23,329  $3,822    $595,758
Long-term borrowings........    118,458    19,500   21,000      --     158,958
Operating lease
 obligations................        381       512      429     111       1,433
                              ---------   -------  -------  ------    --------
    Total...................   $630,901   $76,557  $44,758  $3,933    $756,149
                              =========   =======  =======  ======    ========

Off-Balance Sheet Arrangements
------------------------------

    In the normal course of business, the Corporation makes off-balance sheet
arrangements, including credit commitments to its customers to meet their
financial needs.  These arrangements involve, to varying degrees, elements of
credit and interest rate risk not recognized in the consolidated statement of
financial condition.  The Bank makes personal, commercial, and real estate
lines of credit available to customers as well as stand by letters of credit
or financial guarantees.

    Commitments to extend credit to customers are subject to the Bank's normal
credit policies and are essentially the same as those involved in extending
loans to customers.    See Note 17 of the Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K for additional information.

Impact of Inflation
-------------------

    The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America.  These principles generally require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation.

    Unlike most industrial companies, virtually all the assets and liabilities
of a financial institution are monetary in nature.  The primary impact of
inflation is reflected in the increased cost of our operations.  As a result,
interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation.  Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.  In a period of rapidly rising interest rates,
the liquidity and maturities structures of our assets and liabilities are
critical to the maintenance of acceptable performance levels.

    The principal effect of inflation on earnings, as distinct from levels of
interest rates, is in the area of noninterest expense.  Expense items such as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation.  An additional effect of
inflation is the possible increase in dollar value

                                           56

<PAGE>



of the collateral securing loans that we have made.  Our management is unable
to determine the extent, if any, to which properties securing loans have
appreciated in dollar value due to inflation.

Recent Accounting Pronouncements
--------------------------------

    For a discussion of new accounting pronouncements and their impact on the
Corporation, see Note 1 of the Notes to Consolidated Financial Statements
contained in Item 8 of this Form 10-K.

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

    Quantitative Disclosures About Market Risk.  The table below represents
the balances of the Bank's financial instruments at March 31, 2007.  The
expected maturity categories take into consideration projected prepayment
rates as well as actual amortization of principal.  In preparation of the
table, numerous assumptions were made regarding prepayment rates and deposit
account interest sensitivity.




<PAGE>
<TABLE>

                                             Over 1     Over 2      Over 3             Carrying     Fair
                          Average   Within   Year to    Years       Years      Beyond    Value      Value
                           Yield    1 year   2 Years  to 3 Years  to 5 Years   5 Years   Total      Total
                          -------  --------  -------- ----------  ----------  --------  --------  ---------
                                                        (Dollars in thousands)

                        <c>      <c>       <c>      <c>         <c>        <c>       <c>       <c>
Interest-Sensitive Assets:

Loans receivable.........  8.71%  $737,412  $160,106  $   69,094 $   41,117 $   47,141 $1,054,870 $1,049,670
Mortgage-backed
 securities..............  4.91%     7,492     4,992       3,208      3,545      7,144     26,381     26,390
Investments and other
 interest-earning
 assets..................  4.13%    48,641     6,760       2,467      1,880      6,113     65,861     65,861
Total Interest
 Sensitive Assets........  8.35%   793,545   171,858      74,769     46,542     60,398  1,147,112  1,141,921
Cumulative Totals........    --    793,545   965,403   1,040,172  1,086,714  1,147,112         --         --

Interest-Sensitive Liabilities:

Checking accounts........  0.58%     7,829    31,426      31,426     28,376     70,940    169,997    169,997
Money market
 ultimate accounts.......  3.64%   131,540    14,093      14,093      8,053     20,133    187,912    187,912
Savings accounts.........  0.69%     4,325     2,163       2,163      3,708      9,269     21,628     21,628
Certificates of deposit..  4.60%   551,495    29,434       7,868      6,925         36    595,758    590,370
Other borrowings(1)......  4.74%   114,128    20,583      22,082        722      1,443    158,958    158,252
Total Interest Sensitive
 Liabilities.............  3.74%   809,317    97,699      77,632     47,784    101,821  1,134,253  1,128,159
Cumulative Totals........    --    809,317   907,016     984,648  1,032,432  1,134,253         --         --

Off-Balance Sheet Items:

Commitments to
 extend credit...........  9.03%   241,858        --          --         --         --    241,858    241,858
Unused lines of credit...  8.75%   141,600        --          --         --         --    141,600    141,600
Credit card
 arrangements............ 12.86%    10,105        --          --         --         --     10,105     10,105
Stand by letters of
 credit..................    --      3,056        --          --         --         --      3,056      3,056
                                  --------  --------  ---------- ---------- ----------  --------- ----------
Total Off-Balance Sheet
 Items...................         $396,619  $     --  $       -- $       -- $       --  $ 396,619 $  396,619
                                  ========  ========  ========== ========== ==========  ========= ==========
---------
(1) Includes borrowing related to investment in real estate for a joint venture.

</TABLE>


    As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table.  For
example, although certain assets and liabilities may have similar maturities,
they may react in different degrees to changes in market interest rates.  In
addition, in the event of changes in interest rates, expected rates of
prepayments on loans and withdrawals from savings accounts might deviate
significantly from those assumed in presenting the table.  Therefore, the data
presented in the table should not be relied upon as necessarily indicative of
actual future results.

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

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

                Management's Annual Report on Internal
                  Control Over Financial Reporting                    59
                Report of Independent Registered Public
                  Accounting Firm                                     60
                Consolidated Statement of Financial Position
                  as of March 31, 2007 and 2006                       62
                Consolidated Statement of Income for the Years
                  Ended  March 31, 2007, 2006 and 2005                63
                Consolidated Statement of Stockholders' Equity
                  for the Years Ended March 31, 2007, 2006 and 2005   64
                Consolidated Statement of Cash Flows for the Years
                  Ended March 31, 2007, 2006 and 2005                 65
                Notes to Consolidated Financial Statements            66

                                          58

<PAGE>



Management's Annual Report on Internal Control Over Financial Reporting:
------------------------------------------------------------------------

   MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Horizon Financial Corp. and its subsidiaries ("the Company") is
responsible for establishing and maintaining adequate internal control over
financial reporting, and for performing an assessment of the effectiveness of
internal control over financial reporting as of March 31, 2007. The Company's
internal control over financial reporting is a process designed under the
supervision of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.

The Company's system of internal control over financial reporting includes
policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions and
dispositions of assets of the Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of Management and Directors of the
Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.

Management recognizes that there are inherent limitations in the effectiveness
of any system of internal control, and accordingly, even effective internal
control can provide only reasonable assurance with respect to financial
statements preparation and fair presentation. Further, because of changes in
condition, the effectiveness of internal control may vary over time.

Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer,
the Company performed an assessment of the effectiveness of the Company's
internal control over financial reporting as of March 31, 2007 based upon
criteria in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this
assessment, Management determined that the Company's internal control over
financial reporting was effective as of March 31, 2007.

The Company's independent registered public accounting firm, Moss Adams LLP
who audits the Company's consolidated financial statements, have issued an
attestation report on Management's assessment and on the effectiveness of the
Company's internal control over financial reporting. This report follows.

Dated June 13, 2007

                                          59

<PAGE>



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Horizon Financial Corp. and Subsidiary

We have audited the accompanying consolidated statement of financial position
of Horizon Financial Corp. and Subsidiary (the "Company") as of March 31, 2007
and 2006, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended March
31, 2007. We also have audited management's assessment included in the
accompanying Management Report on Internal Control over Financial Reporting
that Horizon Financial Corp. maintained effective internal control over
financial reporting as of March 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Horizon Financial Corp. and
Subsidiary's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on these financial statements, an
opinion on management's assessment, and an opinion on the effectiveness of
Horizon Financial Corp. and Subsidiary's internal control over financial
reporting based on our audits.

We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement in all
material respects. Our audits of financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinion.

The Company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A Company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and Directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

                                       60

<PAGE>



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Horizon Financial Corp. and Subsidiary as of March 31, 2007 and 2006, and
the results of their operations and cash flows for each of the three years in
the period ended March 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
management's assessment that Horizon Financial Corp. and Subsidiary maintained
effective internal control over financial reporting as of March 31, 2007, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Furthermore, in our opinion, Horizon
Financial Corp. and Subsidiary maintained, in all material respects, effective
internal control over financial reporting as of March 31, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

  /s/ MOSS ADAMS LLP

Everett, Washington
June 13, 2007

                                       61

<PAGE>




                                                       HORIZON FINANCIAL CORP.
                                  Consolidated Statement of Financial Position
                                                       March 31, 2007 and 2006
------------------------------------------------------------------------------

                                  ASSETS
                                                     Dollars in Thousands
                                                   -------------------------
                                                      2007           2006
                                                   ----------     ----------

  Cash and cash equivalents                        $   40,833     $   24,190
  Interest-bearing deposits                             5,379          9,439
  Investment securities
    Available-for-sale (amortized cost
      2007: $47,675; 2006: $54,761)                    52,865         60,137
    Held-to-maturity (estimated fair
      value 2007: $372; 2006: $374)                       370            370
  Mortgage-backed securities
    Available-for-sale (amortized
      cost 2007: $26,220; 2006: $23,559)               26,233         23,351
    Held-to-maturity (estimated fair
      value 2007: $157; 2006: $497)                       148            482
  Federal Home Loan Bank ("FHLB") Stock                 7,247          7,247
  Loans held for sale                                   4,493          5,252
  Loans receivable, net of allowance for
    loan losses of $15,889 in 2007 and
    $14,184 in 2006                                 1,054,870        918,510
  Investment in real estate in a joint venture         17,169         16,928
  Accrued interest and dividends receivable             6,626          5,185
  Premises and equipment, net                          27,631         26,317
  Net deferred income tax assets                        3,733          2,254
  Income tax currently receivable                        --              808
  Real estate owned                                       725           --

  Other assets                                         22,005         16,258
                                                   ----------     ----------
  TOTAL ASSETS                                     $1,270,327     $1,116,728
                                                   ==========     ==========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

  Deposits                                         $  975,295     $  834,299
  Accrued interest payable and other liabilities        9,508          6,919
  Other borrowed funds                                138,715        141,561
  Borrowing related to investment in real estate
    in a joint venture                                 20,243         18,276
  Advances by borrowers for taxes and insurance           454            467
  Income tax currently payable                            237           --
  Deferred compensation                                 2,020          1,883
                                                   ----------     ----------
        Total liabilities                           1,146,472      1,003,405
                                                   ----------     ----------
  COMMITMENTS AND CONTINGENCIES (Notes 14 & 17)

  STOCKHOLDERS' EQUITY
    Serial preferred stock, $1 par value,
      10,000,000 shares authorized; none issued
      or outstanding
    Common stock, $1 par value, 30,000,000 shares
      authorized; 12,254,476 and 9,898,168 issued
      and outstanding, respectively                    12,254          9,898
    Additional paid-in capital                         51,489         54,116
    Retained earnings                                  56,770         45,991
    Accumulated other comprehensive income              3,342          3,318
                                                   ----------     ----------
        Total stockholders' equity                    123,855        113,323
                                                   ----------     ----------
  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY       $1,270,327     $1,116,728
                                                   ==========     ==========

              See accompanying notes to these financial statements

                                       62

<PAGE>






                                                       HORIZON FINANCIAL CORP.
                                              Consolidated Statement of Income
                                    Years Ended March 31, 2007, 2006, and 2005
------------------------------------------------------------------------------

                                                  Dollars in Thousands
                                            ---------------------------------
                                                2007        2006       2005
                                            ---------   ---------   ---------
INTEREST INCOME
  Interest on loans                         $  88,589   $  65,857   $  48,131
  Investments and mortgage-backed securities
    Taxable interest                            3,492       3,136       3,598
    Nontaxable interest income                    293         196         149
    Dividends                                     226         199         304
                                            ---------   ---------   ---------
      Total interest income                    92,600      69,388      52,182
                                            ---------   ---------   ---------
INTEREST EXPENSE
  Interest on deposits                         32,251      19,988      13,219
  Interest on other borrowings                  7,882       4,908       2,925
                                            ---------   ---------   ---------
      Total interest expense                   40,133      24,896      16,144
                                            ---------   ---------   ---------
      Net interest income                      52,467      44,492      36,038

PROVISION FOR LOAN LOSSES                       1,850       2,575       1,700
                                            ---------   ---------   ---------
      Net interest income after provision
      for loan losses                          50,617      41,917      34,338
                                            ---------   ---------   ---------
NONINTEREST INCOME
  Service fees                                  3,274       2,905       2,364
  Net gain on sales of loans - servicing
    retained                                       23          55          66
  Net gain on sales of loans - servicing
    released                                      827       1,040         983
  Net gain (loss) on sale of investment
    securities                                    (10)       (476)        476
  Other                                         1,724       1,887       1,824
                                            ---------   ---------   ---------
      Total noninterest income                  5,838       5,411       5,713
                                            ---------   ---------   ---------
NONINTEREST EXPENSE
  Compensation and employee benefits           16,328      14,614      12,635
  Building occupancy                            4,280       3,575       2,967
  Data processing                                 862         887         901
  Advertising                                     751         720         688
  Other expenses                                5,640       4,974       4,428
                                            ---------   ---------   ---------
      Total noninterest expense                27,861      24,770      21,619
                                            ---------   ---------   ---------

INCOME BEFORE PROVISION FOR INCOME TAX         28,594      22,558      18,432

PROVISION FOR INCOME TAX
  Current                                      11,058       6,903       5,948
  Deferred                                     (1,492)       --          (579)
                                            ---------   ---------   ---------
      Total provision for income tax            9,566       6,903       5,369
                                            ---------   ---------   ---------
NET INCOME                                  $  19,028   $  15,655   $  13,063
                                            =========   =========   =========

BASIC EARNINGS PER SHARE                       $1.55       $1.26*      $1.02*
                                               =====       =====       =====
DILUTED EARNINGS PER SHARE                     $1.53       $1.25*      $1.01*
                                               =====       =====       =====
*restated for the 5 for 4 stock split in the form of a 25% stock dividend
distributed on October 23, 2006.

              See accompanying notes to these financial statements

                                       63

<PAGE>


<TABLE>
                                                                                     HORIZON FINANCIAL CORP.
                                                              Consolidated Statement of Stockholders' Equity
                                                                  Years Ended March 31, 2007, 2006, and 2005
------------------------------------------------------------------------------------------------------------

                                                                        Dollars in Thousands
                                                            -----------------------------------------------

                                          Common Stock                                         Accumulated
                                     ---------------------  Additional               Unearned     Other
                                     Number of    At Par      Paid-In     Retained   ESOP     Comprehensive
                                       Shares      Value      Capital     Earnings   Shares    Income(Loss)
                                     ---------    --------   ---------    --------   --------  -----------

                                  <c>        <c>         <c>         <c>          <c>         <c>
BALANCE, March 31, 2004               10,405     $  10,405   $  56,894   $  36,926    $  (144)    $ 5,226
  Net income                            --            --         --         13,063       --          --
  Other comprehensive income
   Change in unrealized gains on
     available-for-sale securities,
     net tax benefit of $950            --            --         --           --         --        (1,844)
       Total other comprehensive
       income
    Comprehensive income
Recognition of ESOP shares released     --            --         --           --           72        --
Cash dividends on common stock
 at $.53 per share                      --            --         --         (5,383)      --          --
Stock options exercised                   83            83         414        --         --          --
Treasury stock purchased                --            --         --           --         --          --
Retirement of treasury stock            (450)         (450)     (2,571)     (5,667)      --          --
                                    --------      --------    --------    --------   --------    --------
BALANCE, March 31, 2005               10,038        10,038      54,737      38,939        (72)      3,382

  Net income                            --            --         --         15,655       --          --
  Other comprehensive income
   Change in unrealized gains
     losses on available-for-sale
     securities, net tax benefit
     of $34                             --            --         --           --         --           (64)
       Total other comprehensive
       income
  Comprehensive income
Recognition of ESOP shares released     --            --         --           --          (72)       --
Cash dividends on common stock
 at $.57 per share                      --            --         --         (5,651)       --         --
Stock options exercised                   73            73         391        --          --         --
Stock award plan                        --            --            22        --          --         --
Tax benefit associated with
 stock options                          --            --           179        --          --         --
Treasury stock purchased                --            --         --           --          --         --
Retirement of treasury stock            (213)         (213)     (1,213)     (2,952)       --         --
                                    --------      --------    --------    --------   --------    --------
BALANCE, March 31, 2006                9,898         9,898      54,116      45,991        --        3,318
                                    --------      --------    --------    --------   --------    --------
Comprehensive income
  Net income                            --            --         --         19,028        --         --
  Other comprehensive income
   Change in unrealized gains losses
     on available-for-sale
     securities, net tax of $13         --            --         --           --          --           24
       Total other comprehensive
       income
  Comprehensive income
Cash dividends on common stock
 at $.495 per share                    --             --         --           --        (6,074)      --
5 for 4 stock split in the form
 of a 25% stock dividend              2,453          2,453      (2,453)       --          --         --
Cash paid in lieu of fractional
 shares                                --             --         --           --           (10)      --
Stock options exercised                  22             22         137        --          --         --
Stock award plan                          3              3         289        --          --         --
Tax benefit associated with
 stock options                         --             --            55        --          --         --
Treasury stock purchased               --             --         --           --          --         --
Retirement of treasury stock           (122)          (122)       (655)     (2,165)       --         --
                                    --------      --------    --------    --------   --------    --------
BALANCE, March 31, 2007               12,254      $ 12,254    $ 51,489    $ 56,770   $    --     $  3,342
                                    ========      ========    ========    ========   ========    ========
</TABLE>

<PAGE>
<TABLE>
                                                                   Dollars in Thousands
                                                      -----------------------------------------------
                                                      Treasury                             Total
                                                       Stock         Stockholders'      Comprehensive
                                                      at Cost           Equity             Income
                                                      --------       ------------       -------------

                                                   <c>             <c>                <c>

BALANCE, March 31, 2004                               $    --         $ 109,307
  Net income                                               --            13,063           $  13,063
  Other comprehensive income
   Change in unrealized gains on
     available-for-sale securities,
     net tax benefit of $950                               --            (1,844)             (1,844)
                                                                                          ---------
       Total other comprehensive
       income                                                                                (1,844)
                                                                                          ---------
    Comprehensive income                                                                  $  11,219
                                                                                          =========
Recognition of ESOP shares released                        --                72
Cash dividends on common stock at $.53 per share           --            (5,383)
Stock options exercised                                    --               497
Treasury stock purchased                                 (8,688)         (8,688)
Retirement of treasury stock                              8,688            --
                                                      ---------       ---------
BALANCE, March 31, 2005                                    --           107,024
  Net income                                               --            15,655           $  15,655
  Other comprehensive income
   Change in unrealized gains
     losses on available-for-sale
     securities, net tax benefit of $34                    --               (64)                (64)
                                                                                          ---------
       Total other comprehensive
       income                                                                                   (64)
                                                                                          ---------
  Comprehensive income                                                                    $  15,591
                                                                                          =========
Recognition of ESOP shares released                        --                72
Cash dividends on common stock
 at $.57 per share                                         --            (5,651)
Stock options exercised                                    --               464
Stock award plan                                           --                22
Tax benefit associated with
 stock options                                             --               179
Treasury stock purchased                                 (4,378)         (4,378)
Retirement of treasury stock                              4,378            --
                                                      ---------       ---------
BALANCE, March 31, 2006                                    --           113,323
                                                      ---------       ---------
Comprehensive income
  Net income                                               --            19,028           $  19,028
  Other comprehensive income
   Change in unrealized gains losses
     on available-for-sale
     securities, net tax of $13                            --                24                  24
                                                                                          ---------
       Total other comprehensive
       income                                                                                    24
                                                                                          ---------
  Comprehensive income                                                                    $  19,052
                                                                                          =========
Cash dividends on common stock
 at $.495 per share                                        --            (6,074)
5 for 4 stock split in the form
 of a 25% stock dividend                                   --              --
Cash paid in lieu of fractional
 shares                                                    --               (10)
Stock options exercised                                    --               159
Stock award plan                                           --               292
Tax benefit associated with
 stock options                                             --                55
Treasury stock purchased                                 (2,942)         (2,942)
Retirement of treasury stock                              2,942            --
                                                      ---------       ---------
BALANCE, March 31, 2007                               $    --         $ 123,855
                                                      =========       =========


                            See accompanying notes to these financial statements

                                                     64
</TABLE>
<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                          Consolidated Statement of Cash Flows
                                     Years Ended March 31, 2007, 2006 and 2005
------------------------------------------------------------------------------
                Increase (Decrease) in Cash and Cash Equivalents

                                                  Dollars in Thousands
                                           ----------------------------------
                                               2007         2006       2005
                                           ---------   ---------    ---------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                               $  19,028   $  15,655    $  13,063
Adjustments to reconcile net income to net
  cash provided by operating activities
  Depreciation                                 1,878       1,608        1,249
  Amortization and deferrals, net                212        (482)        (774)
  Stock dividends - FHLB stock                  --           (29)        (203)
  Provision for loan losses                    1,850       2,575        1,700
  Provision for loss - Real Estate Owned         110        --           --
  Stock award plan compensation                  292          22         --
  Excess tax benefits from the exercise
   of stock options                              (55)       (179)        --
  Provision for deferred income tax           (1,492)       --           (579)
Changes in assets and liabilities
  Interest and dividends receivable           (1,441)       (686)        (467)
  Interest payable                             1,448       1,116          595
  Federal income tax payable                   1,045        (477)      (1,706)
  Net change in loans held for sale              759      (1,183)      (2,735)
  Other assets                                (5,691)       (818)         684
  Other liabilities                            1,168         341       (3,206)
                                           ---------   ---------    ---------
    Net cash flows from operating activities  19,111      17,463        7,621
                                           ---------   ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in interest-bearing
    deposits, net                              4,060      (5,532)      16,860
  Purchases of investment securities -
    available-for-sale                        (3,395)    (23,555)     (11,465)
  Proceeds from sales and maturities of
    investment securities - available-
    for-sale                                  10,482      35,590       22,331
  Purchases of mortgage-backed
    securities - available-for-sale          (18,319)    (12,174)        --
  Proceeds from sales and maturities of
    mortgage-backed securities - available-
    for-sale                                  15,658       6,969        9,010
  Proceeds from maturities of mortgage-backed
    securities - held-to-maturity                334         403          659
  Net change in loans                       (139,257)   (115,550)    (147,546)
  Purchases of bank premises and equipment    (3,192)     (5,143)      (6,837)
  Net change in investment in joint venture     (241)        276      (17,204)
                                           ---------   ---------    ---------
    Net cash flows from investing
      activities                            (133,870)   (118,716)    (134,192)
                                           ---------   ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in deposits                     140,996      87,450       76,590
  Advances of other borrowed funds           369,654     229,995      142,297
  Repayments of other borrowed funds        (372,500)   (207,500)     (90,700)
  Borrowing related to inv. in real
    estate in a joint venture                  1,967       1,555       16,721
  Common stock issued, net                       149         464          497
  Tax benefit associated with stock options       55         179         --
  Cash dividends paid                         (5,977)     (5,572)      (5,328)
  Treasury stock purchased                    (2,942)     (4,378)      (8,688)
                                           ---------   ---------    ---------
    Net cash flows from financing
      activities                             131,402     102,193      131,389
                                           ---------   ---------    ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS       16,643         940        4,818

CASH AND CASH EQUIVALENTS, beginning of year  24,190      23,250       18,432
                                           ---------   ---------    ---------
CASH AND CASH EQUIVALENTS, end of year     $  40,833   $  24,190    $  23,250
                                           =========   =========    =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Information
  Cash paid during the year for interest   $  38,684   $  23,780    $  15,548
                                           =========   =========    =========
  Cash paid during the year for income tax $   9,949   $   7,201    $   7,661
                                           =========   =========    =========
NONCASH INVESTING AND FINANCING TRANSACTIONS
  Property taken in settlement of loans    $     835   $    --      $    --
                                           =========   =========    =========

             See accompanying notes to these financial statements

                                       65

<PAGE>





                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations - Horizon Financial Corp. (the "Company"), through its
wholly-owned subsidiary, Horizon Bank (the "Bank"), provides a full range of
commercial and mortgage lending services to borrowers and a full range of
customer services to depositors through 18 full-service offices, four
commercial loan centers, and four real estate loan centers located in Whatcom,
Skagit, Snohomish, and Pierce Counties of Washington State. The Bank is a
state-chartered commercial bank, the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC").

Financial Statement Presentation and Use of Estimates - The financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and reporting practices
applicable to the banking industry. All per share data included in the
financial statements have been restated to reflect all stock splits and
dividends as well as the Company's ongoing share repurchase activities.

In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of revenues and
expenses for the period and assets and liabilities as of the balance sheet
date. Actual results could differ from estimated amounts.  Material estimates
that are particularly susceptible to significant change relate to the
determination of the allowance for losses on loans, the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans
and deferred tax assets. In connection with the determination of the estimated
losses on loans and foreclosed assets held for sale, management obtains
independent appraisals for significant properties.

Principles of Consolidation - As of March 31, 2007, 2006, and 2005, and for
the years then ended, the consolidated financial statements include the
accounts of the Company, and its wholly-owned subsidiary, the Bank. Westward
Financial Services, Inc. ("Westward"), a land development Company, is a
wholly-owned subsidiary of the Bank, and its accounts are also included in the
consolidation. All material inter-Company balances and transactions have been
eliminated.

In October 2004, the Bank's wholly-owned subsidiary, Westward, entered into a
real estate development joint venture in Greenbriar Northwest LLC ("GBNW"), an
established residential land development company headquartered in Bellingham,
Washington. The Company believes that GBNW is a variable interest entity.
Under the Financial Accounting Standards Board ("FASB") Interpretation No.
("FIN") 46, GBNW is consolidated in the accompanying financial statements. The
Company accounts for the unowned portion of the joint ventures' real estate as
a minority interest. The assets of the real estate joint venture have a
carrying value of approximately $17.2 million, with a related borrowing of
approximately $20.2 million.

Cash and Cash Equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and noninterest-bearing amounts due from
banks with maturities of three months or less.

Included in cash and cash equivalents are legally reserved amounts which are
required to be maintained on an average basis in the form of cash and balances
due from the Federal Reserve Bank and other banks. Reserve requirements were
$500,000 and $7.5 million for the years ended March 31, 2007 and 2006,
respectively.

The Company maintains cash balances at several banks. Accounts at each
institution are insured by the FDIC up to $100,000.

Investments in Interest-Bearing Deposits - Investments in interest-bearing
deposits consist principally of funds on deposit with the FHLB and short-term
certificates of deposit with Western Washington financial institutions. They
mature within one year and are carried at cost. Amounts, at times, may exceed
FDIC insured limits.

Investments and Mortgage-Backed Securities - The Company classifies its
securities into one of three categories:  (1) held-to-maturity, (2)
available-for-sale, or (3) trading. The Company had no trading securities at
March 31, 2007 and 2006. Investment securities are categorized as
held-to-maturity when the Bank has the positive intent and ability to hold
those securities to maturity. Securities which are held-to-maturity are stated
at cost, adjusted for amortization of premiums, and accretion of discounts
which are recognized as adjustments to interest income.

                                       66

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)

Investment securities categorized as available-for-sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available-for-sale securities are
recorded at fair value, with the net unrealized gain or loss included as other
comprehensive income within the statement of stockholders' equity, net of the
related tax effect. Realized gains or losses on dispositions are based on the
net proceeds and the adjusted carrying amount of securities sold, using the
specific identification method.

Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are other than temporary are recognized
by write-downs of the individual securities to their fair value. Such
write-downs would be included in earnings as realized losses. In estimating
other-then-temporary impairment losses, management considers (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value. Gains
and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.

Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.

Federal Home Loan Bank Stock - The Bank's investment in FHLB stock is a
restricted investment carried at par value ($100 per share), which reasonably
approximates its fair value. As a member of the FHLB system, the Bank is
required to maintain a minimum level of investment in FHLB stock based on
specific percentages of its outstanding FHLB advances.  The Bank may request
redemption at par value of any stock in excess of the amount the Bank is
required to hold. Stock redemptions are at the discretion of the FHLB.

Loans Held for Sale - Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by changes to income.

Mortgage loans held for sale can be sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is reduced
by the cost allocated to the associated mortgage servicing rights. Gains or
losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.

Loans Receivable - Loans receivable that management has the intent and ability
to hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal adjusted for any charge-offs, the allowance for
loan losses, and any net deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans. Interest income is
accrued on the daily unpaid principal balance using the simple-interest
method. Loan origination fees, net of certain direct loan origination costs,
are deferred and recognized as an adjustment of the yield on the related
loans, using the interest method.

Impaired Loans and Related Income - A loan is considered impaired when
management determines that it is probable that all contractual amounts of
principal and interest will not be paid as scheduled in the loan agreement.
These loans include nonaccruing loans past due 90 days or more and other loans
that management considers to be impaired.

When a loan is placed on nonaccrual status, all interest previously accrued,
but not collected, is reversed and charged against interest income. Income on
nonaccrual loans is then recognized only when the loan is brought current, or
when, in the opinion of management, the borrower has demonstrated the ability
to resume payments of principal and interest. Interest income on restructured
loans is recognized pursuant to the terms of new loan agreements. Interest
income on impaired loans is monitored and is recognized based upon the terms
of the underlying loan agreement. However, the recorded net investment in
impaired loans, including accrued interest, is limited to the present value of
the expected cash flows of the impaired loan, the observable fair market value
of the loan, or the fair value of the loan's collateral.

                                       67

<PAGE>


                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)

Provision for Loan Losses - Management estimates the provision for loan losses
by 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 allowance for loan losses is based upon
factors and trends identified by future market factors beyond the Company's
control, which may result in losses or recoveries differing significantly from
those provided for in the financial statements.

The majority of the Company's loan portfolio consists of commercial loans and
single-family residential loans secured by real estate in the Whatcom, Skagit,
Snohomish, and Pierce County areas of Washington. Real estate prices in these
markets are stable at this time. However, the ultimate collectibility of a
substantial portion of the Company's loan portfolio may be susceptible to
changes in local market conditions in the future.

The allowance for loan losses is established as losses are estimated to have
occurred through the provision for loan losses charged to earnings. Loan
losses are charges against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.

While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgment about information available to them at the time
of their examination.

Mortgage Servicing Rights - Servicing assets are recognized as separate assets
when rights are acquired through sale of financial assets. Generally, for
sales of mortgage loans, a portion of the cost of originating the loan is
allocated to the servicing right based on relative fair value. Fair value is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the
present value of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating
future net servicing income, such as the cost to service, the discount rate,
the custodial earnings rate, an inflation rate, ancillary income, prepayment
speeds and default rates and losses. Capitalized servicing rights are reported
in other assets and are amortized into non-interest income in proportion to,
and over the period of, the estimated future net servicing income of the
underlying financial assets.

Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant risk characteristics, such as
interest rate, loan type and investor type. Impairment is recognized through a
valuation allowance for an individual tranche, to the extent that fair value
is less than the capitalized amount for the tranche. If the Company later
determines that all or a portion of the impairment no longer exists for a
particular tranche, a reduction of the allowance may be recorded as an
increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal or a fixed
amount per loan and are recorded as income when earned. The amortization of
mortgage servicing rights is netted against loan servicing fee income.
Premises and Equipment   Premises and equipment are stated at cost less
accumulated depreciation. Major renewals or betterments are capitalized and
depreciated over their estimated useful lives. Depreciation is computed by the
straight-line method over the estimated useful lives of thirty-five years for
buildings and three to ten years for equipment.

Bank Owned Life Insurance - The carrying amount of bank owned life insurance
approximates its fair value. Fair value of bank owned life insurance is
estimated using the cash surrender value net of surrender charges. The Bank
owns approximately $19.4 and $13.7 million in bank owned life insurance as of
March 31, 2007 and 2006, which is included in Other Assets.

                                       68

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)

Goodwill - Goodwill was recognized in connection with the purchase of branch
assets and related liabilities. The Company performs periodic evaluations for
impairment. During the years ended March 31, 2007 and 2006, impairment testing
was performed and Goodwill was found not to be impaired. At March 31, 2007 and
2006, Goodwill in the amount of $545,000 was included in Other Assets.

Other Real Estate Owned - Other real estate owned includes properties acquired
through foreclosure. These properties are recorded at the lower of cost or
estimated fair value. Losses arising from the acquisition of property, in full
or partial satisfaction of loans, are charged to the allowance for loan
losses.

Subsequent to their transfer to other real estate owned, these assets continue
to be recorded at the lower of cost or fair value (less estimated cost to
sell), based on periodic evaluations. Generally, legal and professional fees
associated with foreclosures are expensed as incurred. Costs incurred to
improve property prior to sale are capitalized, however, in no event are
recorded costs allowed to exceed fair value. Subsequent gains, losses, or
expenses recognized on the sale of these properties are included in
noninterest income or expense.

Income Taxes - The Company reports income and expenses using the accrual
method of accounting and files a consolidated tax return which includes its
subsidiary. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled using the
liability method. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Deferred taxes result from temporary differences in the recognition of certain
income and expense amounts between the Company's financial statements and its
tax returns.

Earnings Per Share - Basic earnings per share amounts are computed based on
the weighted average number of shares outstanding during the period after
giving retroactive effect to stock dividends and stock splits. Diluted
earnings per share amounts are computed by determining the potential number of
additional shares that may be outstanding from the exercise of stock options
using the treasury stock method.

Financial Instruments - All financial instruments held or issued by the
Company are held or issued for purposes other than trading. In the ordinary
course of business, the Bank enters into off-balance-sheet financial
instruments consisting of commitments to extend credit. These commitments are
recorded in the financial statements when they are funded.

Advertising Costs - The Company expenses advertising costs as they are
incurred.

Share Based Payment - The Company adopted Statement of Financial Accounting
Standard No. 123R, Share-Based Payment, (SFAS 123R) on April 1, 2006 using the
"modified prospective" method. Under this method, awards that are granted,
modified, or settled after March 31, 2006 are measured and accounted for in
accordance with Statement 123R. Also under this method, expense is recognized
for unvested awards that were granted prior to April 1, 2006 based upon the
fair value determined at the grant date under Statement 123, Accounting for
Stock-based Compensation. For the twelve months ended March 31, 2007, the
Company recognized $292,000 in stock option and restricted stock award
compensation expense as a component of salaries and benefits. As of March 31,
2007, there was approximately $461,000 of total unrecognized compensation cost
related to nonvested options and restricted stock awards which is scheduled to
amortize over the next four years.

Prior to the adoption of Statement 123R, the Company recognized the financial
effects of stock options under the intrinsic value method as permitted by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and as such, previously recognized no compensation cost for
employee stock options.

                                       69

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)

The following table provides pro forma disclosures for the years ended March
31 had the Company accounted for stock-based compensation using Statement 123R
for the years presented:
                                                    (Dollars in Thousands)
                                                    ----------------------
                                                      2006          2005
                                                    --------     --------

Net income as reported                              $ 15,655     $ 13,063

Additional compensation for fair value of
 stock options, net of tax                               (31)         (20)
                                                    --------     --------
Pro forma net income                                $ 15,624     $ 13,043
                                                    ========     ========
Earnings per share
 Basic
    As reported                                       $1.26        $1.02
                                                      =====        =====
    Pro forma                                         $1.26        $1.02
                                                      =====        =====
 Diluted
    As reported                                       $1.25        $1.01
                                                      =====        =====
    Pro forma                                         $1.25        $1.01
                                                      =====        =====

Prior to the adoption of Statement 123R, the Company presented all tax
benefits of deductions resulting from the exercise of stock options as
operating cash flows in the Statement of Cash Flows. Statement 123R requires
the cash flows resulting from the tax benefits resulting from tax deductions
in excess of the compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. The $55,000 excess tax
benefit classified as a financing cash inflow would have been classified as an
operating cash inflow if the Corporation had not adopted Statement 123R.

Transfers of Financial Assets - Transfers of financial assets are accounted
for as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain
effective control over the transferred assets through an agreement to
repurchase them before their maturity.

Comprehensive Income - Accounting principles generally require that recognized
revenue, expenses, gains, and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and losses
on available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.

The components of other comprehensive income and related tax effects are as
follows for the years ended March 31:

                                                 2007       2006       2005
                                               -------    -------    --------
                                                   (Dollars in Thousands)
Unrealized holding gains (losses) on
  available-for-sale securities                $    27    $ (574)    $ (2,318)
Reclassification adjustment for losses
 (gains) realized in income                         10       476         (476)
Net unrealized gains                                37       (98)      (2,794)
Tax effect                                         (13)       34          950
                                               -------    ------     --------
  Net-of-tax amount                            $    24    $  (64)    $ (1,844)
                                               =======    ======     ========

                                         70

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 1 - Nature of Operations and Summary of Significant Accounting Policies
(Continued)

Recent Accounting Pronouncements - In March 2006, the FASB issued SFAS No.
156, Accounting for Servicing of Financial Assets an amendment of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (SFAS 156). SFAS 156 requires all
separately recognized servicing assets and liabilities to be initially
measured at fair value. In addition, entities are permitted to choose to
either subsequently measure servicing rights at fair value and report changes
in fair value in earnings, or amortize servicing rights in proportion to and
over the estimated net servicing income or loss and assess the rights for
impairment. Beginning with the fiscal year in which an entity adopts SFAS 156,
it may elect to subsequently measure a class of servicing assets and
liabilities at fair value. Post adoption, an entity may make this election as
of the beginning of any fiscal year. An entity that elects to subsequently
measure a class of servicing assets and liabilities at fair value should apply
that election to all new and existing recognized servicing assets and
liabilities within that class. The effect of remeasuring an existing class of
servicing assets and liabilities at fair value is to be reported as a
cumulative-effect adjustment to retained earnings as of the beginning of the
period of adoption. SFAS 156 is effective as of the beginning of an entity's
first fiscal year that begins after September 15, 2006. The statement also
requires additional disclosures. The Corporation is currently evaluating the
impact of the adoption of SFAS 156; however, it is not expected to have a
material impact on the Corporation's financial position or results of
operations.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes   an interpretation of FASB Statement No. 109 Accounting for Income
Taxes. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements. This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact of the adoption of FIN 48; however, it is not expected to have a
material impact on the Company's financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require or permit fair value measurements.
Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years.

In February 2007, the Financial Accounting Standards Board released Statement
No. 159, Fair Value Option for Financial Assets and Financial Liabilities.
This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those years.

Reclassifications - Certain reclassifications have been made to prior years'
financial statements to conform with the current year presentation. These
reclassifications have no significant effect on the Company's previously
reported financial position or results of operations.

Note 2 - Interest-Bearing Deposits

Interest bearing deposits consisted of the following at March 31:

                                                      2007         2006
                                                    -------      -------
                                                    (Dollars in Thousands)

FHLB interest-bearing demand                        $ 5,079      $ 9,139
Certificates of deposit                                 300          300
                                                    -------      -------
                                                    $ 5,379      $ 9,439
                                                    =======      =======

                                         71

<PAGE>




                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 2 - Interest-Bearing Deposits (Continued)

The Company has funds on deposit with the FHLB in a demand account. This
account acts like a savings account and earns interest based on the daily
federal funds rate. These funds are uninsured deposits held at the Federal
Home Loan Bank of Seattle. The FHLB of Seattle, a federally chartered
corporation, is one of 12 district FHLB institutions, which operate under the
supervision of the Federal Housing Finance Board. The Finance Board is an
independent agency of the executive branch within the U.S. Government which
ensures that the FHLB operates in a safe and sound manner, remains adequately
capitalized, and raises funds in the capital markets.

Note 3 - Investment Securities

The Company's investment policy requires that the Company purchase only
high-grade investment securities. Purchases of debt instruments are generally
restricted to those rated A or better by a nationally recognized statistical
rating organization.

The amortized cost and estimated fair values of investments, together with
unrealized gains and losses, are as follows as of March 31, 2007 and 2006,
respectively:

<PAGE>
<TABLE>
                                                                      2007
                                                             (Dollars in Thousands)
                                      -----------------------------------------------------------------
                                                                   Gross          Gross
                                                                 Unrealized     Unrealized
                                                     Gross         Losses         Losses      Estimated
                                      Amortized   Unrealized     12 Months     Greater Than      Fair
                                        Costs        Gains        or Less       12 Months       Value
                                      --------      --------     ----------      --------      --------

                                   <c>           <c>          <c>             <c>           <c>
Available-For-Sale Securities
 State and political
   subdivisions and U.S.
   government agency
   securities                         $ 41,350      $     60      $   (124)      $   (178)     $ 41,108
 Marketable equity
   securities                              323         5,559         --              --           5,882
 Mutual funds                            5,000          --            (126)          --           4,874
 Corporate debt securities               1,002          --              (1)          --           1,001
                                      --------      --------      --------       --------      --------
   Total available-for-
     sale securities                    47,675         5,619          (251)          (178)       52,865
Held-To-Maturity Securities           --------      --------      --------       --------      --------
 State and political subdivisions
   and U.S. government
   agency securities                       370             2           --            --             372
   Total held-to-maturity             --------      --------      --------       --------      --------
     securities                            370             2           --            --             372
   Total investment                   --------      --------      --------       --------      --------
     securities                       $ 48,045      $  5,621      $   (251)      $   (178)     $ 53,237
                                      ========      ========      ========       ========      ========

</TABLE>


Certain investment securities shown above currently have fair values less than
amortized cost and therefore contain unrealized losses. At March 31, 2007, the
Company has evaluated these securities and has determined that the decline in
value is temporary and is related to the change in market interest rates since
purchase. The decline in value is not related to any company or industry
specific event. At March 31, 2007, there are approximately 39 investment
securities with unrealized losses. The Company anticipates full recovery of
amortized cost with respect to these securities at maturity or sooner in the
event of more favorable market interest rates.

                                         72

<PAGE>
<PAGE>
<TABLE>

                                                                                    HORIZON FINANCIAL CORP.
                                                                              NOTES TO FINANCIAL STATEMENTS
                                                                             MARCH 31, 2007, 2006, AND 2005
-----------------------------------------------------------------------------------------------------------

Note 3 - Investment Securities (Continued)
                                                                      2006
                                                             (Dollars in Thousands)
                                      -----------------------------------------------------------------
                                                                   Gross          Gross
                                                                 Unrealized     Unrealized
                                                     Gross         Losses         Losses      Estimated
                                      Amortized   Unrealized     12 Months     Greater Than      Fair
                                        Costs        Gains        or Less       12 Months       Value
                                      --------      --------     ----------      --------      --------

                                   <c>           <c>          <c>             <c>           <c>
Available-For-Sale Securities
 State and political
   subdivisions and U.S.
   government agency
   securities                         $ 45,925      $     28     $     (13)      $   (732)    $  45,208
 Marketable equity
   securities                            1,824         6,445          (219)          --           8,050
 Mutual funds                            5,000          --            (131)          --           4,869
 Corporate debt securities               2,012          --              (2)          --           2,010
   Total available-for-               --------      --------     ---------       --------     ---------
     sale securities                    54,761         6,473          (365)          (732)       60,137
Held-To-Maturity Securities           --------      --------     ---------       --------     ---------
 State and political subdivisions
   and U.S. government
   agency securities                       370             4          --             --             374
   Total held-to-maturity             --------      --------     ---------       --------     ---------
     securities                            370             4          --             --             374
   Total investment                   --------      --------     ---------       --------     ---------
     securities                       $ 55,131      $  6,477     $    (365)      $   (732)    $  60,511
                                      ========      ========     =========       ========     =========
</TABLE>


The amortized cost and estimated fair value of investment securities at March
31, 2007, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

                                             (Dollars in Thousands)
                              ------------------------------------------------
                                Available-For-Sale       Held-To-Maturity
                              -----------------------  -----------------------
                              Amortized    Estimated   Amortized    Estimated
                                Cost       Fair Value     Cost      Fair Value
                              --------     ----------   --------    ----------
State and political sub-
 divisions and U.S.
 government agencies
   One year or less           $ 22,868     $ 22,779     $   --      $   --
   More than one to
     five years                 11,294       11,157          370         372
   More than five
     to ten years                5,601        5,571         --          --
   Over ten years                1,587        1,601         --          --
                              --------     --------     --------    --------
                                41,350       41,108          370         372
                              --------     --------     --------    --------
Corporate debt securities
   One year or less              1,002        1,001         --          --
   More than one to
     five years                  --           --            --          --
                              --------     --------     --------    --------
                                 1,002        1,001         --          --
                              --------     --------     --------    --------
Mutual funds and marketable
 equity securities (liquid)      5,323       10,756         --          --
                              --------     --------     --------    --------
Total investment securities   $ 47,675     $ 52,865     $    370    $    372
                              ========     ========     ========    ========

                                         73

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 3 - Investment Securities (Continued)

Proceeds from sales of investments and gross realized gains and losses on
investment sales were as follows for the year ended March 31:

                                            2007          2006          2005
                                          -------       --------     --------
                                                 (Dollars in Thousands)

Proceeds from sales of investments        $ 3,748       $ 15,857     $  9,576
                                          =======       ========     ========
Gross gains realized on sales
  of investments                          $   287       $   --       $    485
                                          =======       ========     ========
Gross losses realized on sales
  of investments                          $  (316)      $   (565)    $     (9)
                                          =======       ========     ========

Information about concentrations of investments in particular industries for
marketable equity securities and corporate debt securities at March 31
consists of the following:
                                              2007               2006
                                       -----------------   -----------------
                                                  Market              Market
                                         Cost     Value      Cost     Value
                                       -------   -------   -------   -------
                                               (Dollars in Thousands)
Marketable equity securities
 Banking                               $   309   $ 1,933   $   309   $ 2,026

 Government agency stocks                   14     3,949     1,515     6,024
                                       -------   -------   -------   -------
                                       $   323   $ 5,882   $ 1,824   $ 8,050
                                       =======   =======   =======   =======
Corporate debt securities
 Private utilities                       1,002     1,001     1,009     1,009

 Manufacturing companies                  --        --       1,003     1,001
                                       -------   -------   -------   -------
Total                                  $ 1,002   $ 1,001   $ 2,012   $ 2,010
                                       =======   =======   =======   =======

At March 31, 2007 and 2006, U.S. government agency and corporate debt
securities of $5.6 million and $3.4 million, respectively, were pledged as
collateral for deposits of state and local government agencies and deposits
for trust accounts in excess of $100,000, as required by Washington State Law.

Note 4 - Mortgage-Backed Securities

Mortgage-backed securities at March 31 consist of the following:

                                               2007
                                     (Dollars in Thousands)
                     ---------------------------------------------------------
                                               Gross        Gross
                                            Unrealized  Unrealized
                                  Gross       Losses      Losses     Estimated
                     Amortized  Unrealized  12 Months   Greater Than   Fair
                       Cost        Gains      or Less    12 Months     Value
                      -------     -------     -------     -------     -------
Available-for-sale
  securities          $26,220     $   178     $   (37)    $  (128)    $26,233
Held-to-maturity
  securities              148           9        --          --           157
   Total mortgage-
     backed           -------     -------     -------     -------     -------
     securities       $26,368     $   187     $   (37)    $  (128)    $26,390
                      =======     =======     =======     =======     =======

                                         74

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

Note 4 - Mortgage-Backed Securities (Continued)

Certain investment securities shown above currently have fair values less than
amortized cost and therefore contain unrealized losses. At March 31, 2007, the
Company has evaluated these securities and has determined that the decline in
value is temporary and is related to the change in market interest rates since
purchase. The decline in value is not related to any company or industry
specific event. At March 31, 2007, there are approximately 34 mortgage-backed
securities with unrealized losses. The Company anticipates full recovery of
amortized cost with respect to these securities at maturity or sooner in the
event of a more favorable market interest rate environment.

                                              2006
                                      (Dollars in Thousands)
                     ---------------------------------------------------------
                                              Gross       Gross
                                           Unrealized   Unrealized
                                 Gross       Losses       Losses     Estimated
                     Amortized  Unrealized  12 Months  Greater Than     Fair
                        Cost      Gains      or Less    12 Months       Value
                     ---------  ----------  ---------  ------------  ---------
Available-for-sale
 securities           $23,559      $103       $ (3)       $(308)      $23,351
Held-to-maturity
 securities               482        15          -            -           497
                      -------      ----       ----        -----       -------
   Total mortgage-
    backed
    securities        $24,041      $118       $ (3)       $(308)      $23,848
                      =======      ====       ====        =====       =======

The amortized cost and estimated fair value of mortgage-backed securities at
March 31, 2007, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right
to prepay obligations with or without prepayment penalties.

                                         (Dollars in Thousands)
                              ---------------------------------------------
                               Available-For-Sale       Held-To-Maturity
                              ---------------------   ---------------------
                              Amortized   Estimated   Amortized   Estimated
                                 Cost    Fair Value      Cost    Fair Value
                              ---------  ----------   ---------  ----------
Mortgage-backed securities
  One year or less             $     -    $     -       $   4       $   4
  More than two to five years        -          -         118         119
  More than five to ten years    5,262      5,285          16          23
  After ten years               20,958     20,948          10          11
                               -------    -------       -----       -----
Total                          $26,220    $26,233       $ 148       $ 157
                               =======    =======       =====       =====

All of the above mortgage-backed securities are rated AAA by a nationally
recognized statistical rating organization.

Proceeds from sales of mortgage-backed securities and gross realized gains and
losses on mortgage-backed security sales were as follows for the year ended
March 31:
                                                     2007     2006    2005
                                                    ------   ------   -----
                                                    (Dollars in Thousands)

Proceeds from sales of mortgage-backed securities   $8,748   $1,054   $   -
                                                    ======   ======   =====
Gross gains realized on sales of mortgage-backed
 securities                                         $   28   $   65   $   -
                                                    ======   ======   =====
Gross losses realized on sales of mortgage-backed
 securities                                         $   (9)  $    -   $   -
                                                    ======   ======   =====

                                         75

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 5 - LOANS RECEIVABLE

Loans receivable (collateralized principally by properties in the Whatcom,
Skagit, Snohomish, and Pierce Counties of Washington State) at March 31
consist of the following:

                                                   (Dollars in Thousands)
                                                   ----------------------
                                                      2007        2006
                                                    --------    --------
First mortgage loans
  1-4 Family                                      $  149,885    $148,515
  1-4 Family construction                             28,576      20,971
  Less participations                                (54,592)    (56,546)
                                                  ----------    --------
    Net first mortgage loans                         123,869     112,940
Construction and land development                    405,348     262,358
Multi family residential                              52,727      70,080
Commercial real estate                               292,212     314,299
Commercial loans                                     146,265     123,445
Home equity secured                                   45,307      44,001
Other consumer loans                                   5,031       5,571
                                                  ----------    --------
                                                   1,070,759     932,694
Less:
  Allowance for loan losses                          (15,889)    (14,184)
                                                  ----------    --------
                                                  $1,054,870    $918,510
                                                  ==========    ========

The Company originates both adjustable and fixed interest rate loans. At March
31, 2007, the Company had adjustable and fixed rate loans as follows:

         Fixed Rate                                    Adjustable Rate
-------------------------------            --------------------------------
                    (Dollars in                                 (Dollars in
                     Thousands)                                 Thousands)
Term to Maturity     Book Value            Term to Maturity     Book Value
----------------    -----------            ----------------     -----------
Less than one year    $20,282              Less than one year    $740,163
One to three years     25,118              One to three years     136,079
Three to five years    19,309              Three to five years     19,007
Five to fifteen years  65,784              Five to fifteen years    1,772
Over fifteen years     43,245              Over fifteen years           -

Loans serviced for others were approximately $126.0 and $99.5 million,
respectively, as of March 31, 2007 and 2006.  The Bank generally receives a
monthly fee of 0.25% to 0.375% per annum of the unpaid balance of each loan
that is serviced for others. Loans sold are without right of recourse to the
Bank by the buyer of the loan interests in the event of default by the
borrower.

The allowance for loan losses at March 31, and changes during the year are as
follows:

                                                2007       2006       2005
                                              -------    -------     -------
                                                  (Dollars in Thousands)

Balance, beginning of year                    $14,184    $11,767     $10,122
Provision for loan losses                       1,850      2,575       1,700
Loan chargeoffs                                  (195)      (165)       (229)
Loan recoveries                                    50          7         174
                                              -------    -------     -------
Balance, end of year                          $15,889    $14,184     $11,767
                                              =======    =======     =======

                                         76

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 5 -  LOANS RECEIVABLE (Continued)

The following is a summary of information pertaining to impaired and
non-accrual loans:

                                                             March 31,
                                                         ------------------
                                                          2007       2006
                                                         ------      ------
                                                      (Dollars in Thousands)

Impaired loans without a valuation allowance             $    -      $    -
Impaired loans with a valuation allowance                 4,172       5,114
                                                         ------      ------
   Total impaired loans                                  $4,172      $5,114
                                                         ======      ======
Valuation allowance related to impaired loans            $  577      $  856
Total non-accrual loans                                  $  226      $1,161
Total loans past-due 90 days or more and still accruing  $    -      $    -

                                                       Years Ended March 31,
                                                     ------------------------
                                                      2007     2006     2005
                                                     ------   ------   ------
                                                      (Dollars in Thousands)

Average investment in impaired loans                 $5,063   $5,070    $964
                                                     ======   ======    ====
Interest income recognized on impaired loans         $  276   $    -    $  -
                                                     ======   ======    ====
Interest income recognized on a cash basis on
 impaired loans                                      $    -   $    -    $  -
                                                     ======   ======    ====

No additional funds are committed to be advanced in connection with impaired
loans.

NOTE 6 - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

Accrued interest and dividends receivable at March 31 is summarized as
follows:
                                                         2007       2006
                                                        ------     ------
                                                     (Dollars in Thousands)

Investment securities                                   $  528     $  574
Mortgage-backed securities                                 111        116
Loans receivable                                         5,980      4,492
Dividends on marketable equity securities                    7          3
                                                        ------     ------
                                                        $6,626     $5,185
                                                        ======     ======

NOTE 7 - PREMISES AND EQUIPMENT

Premises and equipment at March 31 consisted of:
                                                         2007       2006
                                                        ------     ------
                                                      (Dollars in Thousands)

Buildings                                              $ 19,988   $ 15,043
Equipment                                                12,576     15,852
                                                       --------   --------
                                                         32,564     30,895
Accumulated depreciation                                (11,925)   (11,570)
                                                       --------   --------
                                                         20,639     19,325
Land                                                      6,992      6,992
                                                       --------   --------
Balance, end of year                                   $ 27,631   $ 26,317
                                                       ========   ========

                                         77

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 8 - DEPOSITS

A comparative summary of deposits at March 31 follows:
                                                         2007       2006
                                                        ------     ------
                                                     (Dollars in Thousands)
Demand deposits
  Savings                                              $ 21,628   $ 30,808
  Checking                                               78,294     79,774
  Checking (noninterest-bearing)                         91,703     80,778
  Money Market                                          187,912    156,867
                                                       --------   --------
                                                        379,537    348,227
                                                       --------   --------
Time certificates of deposit
  Less than $100,000                                    273,022    246,136
  Greater than or equal to $100,000                     322,736    239,936
                                                       --------   --------
                                                        595,758    486,072
                                                       --------   --------
Total deposits                                         $975,295   $834,299
                                                       ========   ========

Time certificate of deposit accounts, classified by variable and fixed rates,
and their maturities at March 31 were as follows:

                                                2007
                                   ------------------------------
                                         (Dollars in Thousands)
                                   Variable     Fixed
                                     Rate        Rate      Total      2006
                                   -------    --------   --------   --------
Within one year                    $ 8,092    $503,970   $512,062   $323,641
One to two years                     2,545      39,475     42,020    111,315
Two to three years                   6,853       7,672     14,525     19,553
Three to four years                  1,112       8,314      9,426     17,353
Four to five years                     403      13,500     13,903      9,810
Over five years                      3,822           -      3,822      4,400
                                   -------    --------   --------   --------
                                   $22,827    $572,931   $595,758   $486,072
                                   =======    ========   ========   ========

The terms of variable rate certificates of deposit allow customers to make
additional deposits to existing certificates of deposit at any time.

The weighted average nominal interest rate on all deposits at March 31, 2007
and 2006, was 3.56% and 2.54%, respectively.

Interest expense on all deposit accounts for the years ended March 31 is
summarized as follows:
                                              2007       2006       2005
                                            -------    -------    -------
                                               (Dollars in Thousands)
Money market                                $ 6,316    $ 3,456    $ 1,685
Checking                                        510        426        428
Savings                                         167        189        216
Certificates of deposit                      25,258     15,917     10,890
                                            -------    -------    -------
Balance, end of year                        $32,251    $19,988    $13,219
                                            =======    =======    =======

                                         78
<PAGE>


                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 9 - OTHER BORROWED FUNDS

The Bank is a member of the FHLB of Seattle. As a member, the Bank has a
committed line of credit up to 25% of total assets, subject to the Bank
pledging sufficient collateral and maintaining the required stock investment
in the FHLB. Committed lines of credit agreements totaling approximately
$248.5 million and $205.6 million were available to the Bank, of which, $143.5
million and $149.0 million were outstanding at March 31, 2007 and 2006,
respectively. Included in these amounts is the borrowing related to the
investment in real estate in a joint venture of $20.2 million and $18.3
million as of March 31, 2007 and 2006, respectively. These advances bear
interest ranging from 2.75% to 5.69% and 2.67% to 5.08% per annum in 2007 and
2006, respectively. Maturities for the advances are $103.0 million in fiscal
2008, $19.5 million in fiscal 2009, and $21.0 million in fiscal 2010.

The maximum outstanding and average outstanding balances and average interest
rates on advances from the FHLB were as follows for the year ended March 31:

                                               2007       2006       2005
                                              ------     ------     ------
                                                 (Dollars in Thousands)

Maximum outstanding at any month end         $195,000   $149,000   $129,500
Average outstanding                           165,237    134,070     89,820

Weighted average interest rates:

   Annual                                        4.74%      3.68%      3.26%
                                                 ====       ====       ====

   End of year                                   5.03%      4.39%      3.28%
                                                 ====       ====       ====

The Bank has other borrowed funds in the form of retail repurchase agreements.
These agreements are collateralized by securities held by a safekeeping agent
not under control of the Bank. These advances are considered overnight
borrowings and bear interest rates that fluctuate daily based on current
market rates. The Bank had $14.4 million and $10.8 million outstanding as of
March 31, 2007 and 2006, respectively.

As of March 31, 2007, The Bank also had $1.0 million and $32,000 outstanding
as of March 31, 2007 and 2006, respectively, in the form of a TT&L note option
which is included in other borrowed funds.

At March 31, 2007 and 2006, respectively, U.S. government agency and corporate
debt securities of $16.3 million and $14.3 million were pledged as collateral
for retail repurchase agreements.

NOTE 10 - INCOME TAX

A reconciliation of the Company's income tax provision to the statutory
federal income tax rate for the years ended March 31 is as follows:

                                               2007       2006       2005
                                              ------     ------     ------
                                                (Dollars in Thousands)

Provision for income tax at the statutory
 rate of 35 percent                          $10,008     $7,895     $6,451
Increase (decrease) in tax resulting from:
  Nontaxable income                             (469)      (539)      (640)
  Nondeductible expense                           29         15         13
  Dividends received deduction                   (52)       (48)       (35)
  Other, net                                      50       (420)      (420)
                                             -------     ------     ------
Income tax provision                         $ 9,566     $6,903     $5,369
                                             =======     ======     ======

                                         79

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 10 - INCOME TAX (Continued)

The nature and components of the Company's net deferred tax assets
(liabilities), established at an estimated tax rate of 35% are as follows at
March 31:
                                                        2007        2006
                                                      -------     -------
                                                     (Dollars in Thousands)

Deferred Tax Assets
  Deferred compensation agreements                    $   707     $   659
  Financial reporting loan loss reserve not
   recognized for tax purposes                          5,215       4,636
  Financial reporting accrued expenses not
   recognized for tax purposes                            403         264
  Other deferred tax assets                             1,404         708
                                                      -------     -------
     Total deferred assets                              7,729       6,267
                                                      -------     -------

Deferred Tax Liabilities
  Deferred loan fees for tax purposes in excess of
   amounts deferred for financial reporting              (264)       (275)
  Tax effect of unrealized gains on available-for-
   sale securities                                     (1,862)     (1,849)
  FLHB stock dividends                                   (793)       (793)
  Other deferred tax liabilities                       (1,077)     (1,096)
                                                      -------     -------
     Total deferred liabilities                        (3,996)     (4,013)
                                                      -------     -------
     Net deferred tax assets                          $ 3,733     $ 2,254
                                                      =======     =======

The Company believes, based upon the available evidence, that all deferred tax
assets will be realized in the normal course of operations. Accordingly, these
assets have not been reduced by a valuation allowance.

NOTE 11 - BENEFIT PLANS

Deferred Compensation Plan - The Company has entered into deferred
compensation agreements with certain of its officers. The agreements provide
for additional retirement benefits payable over a 12 to 20 year period
following retirement. In connection with these agreements, the Company has
acquired life insurance policies on the individual officers covered by the
deferred compensation agreements. At March 31, 2007 and 2006, the cash
surrender values of these policies included in Other Assets aggregated $1.9
million and $1.8 million, respectively.

The Company performs a present value calculation using an appropriate discount
rate on an annual basis to ensure that deferred compensation plan obligations
are adequately estimated in the accompanying financial statements. The
discount rate was 2.67%, 2.72%, and 3.00% in 2007, 2006, and 2005,
respectively. Deferred compensation expense amounted to $213,000, $137,500,
and $150,000 in 2007, 2006, and 2005, respectively.

Employee Incentive Plan - The Company has an incentive plan with employees
meeting certain service requirements.  Payments made to employees pursuant to
the plan are based upon earnings, growth in deposits and loans and attainment
of certain corporate objectives. Costs of the plan were $2.3 million, $2.1
million, and $1.3 million for the years ended March 31, 2007, 2006, and 2005,
respectively.

Employee Stock Ownership Plan -  The Company has a noncontributory employee
stock ownership plan ("ESOP") for those employees who have completed a minimum
of two years of service. The Company's contribution is determined annually by
the Board of Directors. Participants receive distributions from the ESOP only
in the event of retirement, disability or termination of employment. The
primary purpose of the ESOP is to acquire shares of the Company's common stock
on behalf of ESOP participants.

                                         80

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 11 - BENEFIT PLANS (Continued)

In April 1996, the Company issued a loan to the ESOP in the amount of
$500,000, to purchase 40,000 shares of common stock in the open market. The
loan was to be repaid over a period of ten years, with annual payments
including interest due on March 31 of each year. The ESOP shares initially
were pledged as collateral for this debt. As the obligation was reduced,
shares were released from collateral and allocated to the participants'
accounts at a rate of 10% a year. In May 1997, the Company issued a 15% stock
dividend which added an additional 5,400 shares to the unallocated ESOP
shares.  In May 1999, the Company made an additional loan to the ESOP in the
amount of $154,725, to purchase 12,500 shares of common stock in the open
market. The loan was to be repaid over seven years with annual payments
including interest due March 31. In April 2001, the Company issued a 15% stock
dividend which added an additional 4,789 shares to the unallocated ESOP
shares. In July 2002, the Company issued a 25% stock split which added an
additional 7,342 shares to the unallocated ESOP shares. In October 2006, the
Company issued a 5-for-4 stock split paid in the form of a 25% stock dividend
which added an additional 21,023 shares to the allocated ESOP shares. As of
March 31, 2006, all loans secured by ESOP shares were paid off, and the
remaining shares released. Shares released for allocation were 9,175 for the
year ended March 31, 20076 and 9,180 for the year ended March 31, 2005. The
ESOP shares relating to the loans outstanding as of March 31, 2006 and 2005
were as follows:

                                                      2006         2005
                                                    --------     --------
                                                    (Dollars in Thousands)

Number of shares
  Allocated shares                                  $105,116     $ 93,648
  Unallocated shares                                       -       11,468
                                                    --------     --------
     Total ESOP shares                              $105,116     $105,116
                                                    ========     ========
Fair value
  Unallocated shares                                $      -     $171,206
                                                    ========     ========

Dividends paid on shares of stock are reinvested and the new shares purchased
are allocated to the participants. Compensation expense for the ESOP plan was
$10,000, $105,000, and $105,000 for the years ended March 31, 2007, 2006, and
2005 respectively.

401(k) Plan - Effective January 1, 1993, the Company adopted a defined
contribution 401(k) retirement and savings plan (the "Plan") covering
substantially all employees. The Company contributes three percent of
participating employee's eligible salary to the Plan and a discretionary
amount determined annually by the Board of Directors. Total Company
contributions to the Plan which were recorded as employee benefits expense
amounted to $490,000, $500,000, and $450,000 for the years ended March 31,
2007, 2006, and 2005, respectively.

Stock Option and Award Plans - The Company may grant stock options and/or
awards for a maximum of 937,500 shares of authorized common stock to certain
officers and key employees under the 2005 Incentive Stock Plan. Activity
during the year ended March 31, 2006 also included options granted under the
1995 Stock Option and Incentive Plan, which allowed for a maximum of 743,906
shares, as restated, of authorized common stock to be awarded. Options and
awards are granted at no less than fair market value and may or may not vest
immediately upon issuance based on the terms established by the Board of
Directors. Options and awards are generally exercisable within one to five
years from date of grant and expire after ten years.

The Corporation measures the fair value of each stock option grant at the date
of grant, using the Black Scholes option pricing model. The weighted average
fair value of options granted during the twelve months ended March 31, 2007,
2006, and 2005 was $4.18, $3.81, and $3.48 per share, as adjusted,
respectively. The following assumptions were used in arriving at the fair
value of options granted during the twelve months ended March 31:

                                              2007        2006        2005
                                             ------      ------      ------
Risk-free interest rate                       5.27%       4.17%       4.26%
Dividend yield rate                          2.417%      2.613%      2.875%
Price volatility                             24.77%      25.27%      25.47%
Weighted average expected life of options     3.78 yr.    5.50 yr.    6.20 yr.

                                         81

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 11 - BENEFIT PLANS (Continued)

A summary of option activity under the Plan as of March 31, 2007 and 2006, and
changes during the years then ended is as follows:

                                 Shares of Common Stock
                                ------------------------   Weighted Average of
                                Available for     Under     Exercise Price of
                                Option/Award       Plan     Shares Under Plan
                                -------------     -----    -------------------
                                (Dollars in Thousands)

Balance, March 31, 2005            $      -     $273,215
  Authorized                        937,500            -
  Restricted stock awards           (12,600)
  Granted                           (18,850)      18,850     $16.37 - 17.72
  Exercised                               -     (100,776)    $ 5.17 - 17.14
  Lapsed                              4,238       (4,053)    $ 5.17 - 17.14
  Expired                            (3,868)           -
                                   --------     --------
Balance, March 31, 2006             906,420      187,236
  Authorized                              -            -
  Restricted stock awards           (24,045)
  Granted                           (24,045)      24,045     $ 19.86
  Exercised                               -      (23,884)    $ 5.17 - 17.72
  Lapsed                              4,678       (2,922)    $ 5.17 - 17.72
  Expired                              (995)           -
                                   --------     --------
Balance, March 31, 2007            $862,013     $184,475
                                   ========     ========

                 Options Outstanding                 Options Exercisable
          ---------------------------------  ---------------------------------
                       Weighted                           Weighted
                        Average    Weighted                Average
Range of               Remaining   Average                Remaining    Average
Exercise    Number    Contractual  Exercise    Number     Contractual Exercise
Prices    Outstanding    Life       Price    Exercisable     Life       Price
--------  -----------  ----------  --------  -----------  -----------  -------
$5 to $10   124,317   3.454 years  $ 6.696     124,317    3.454 years  $ 6.696
$10 to $15   10,000   6.205 years  $12.004       9,374    6.100 years  $11.846
$15 to $20   50,158   8.789 years  $17.978      12,537    8.158 years  $16.022

At March 31, 2007, the aggregate intrinsic value of stock options outstanding
and stock options exercisable was $2.2 million and $2.1 million, respectively.

NOTE 12 - STOCKHOLDERS' EQUITY

Capital Requirements - The Company and Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines within the regulatory framework for prompt
corrective action, the Bank must meet specific capital adequacy guidelines
that involve quantitative measures of each entity's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.

                                         82
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                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 12 - STOCKHOLDERS' EQUITY (Continued)

Quantitative measures are established by regulation to ensure capital
adequacy, require maintenance of minimum amounts and ratios of total and Tier
1 capital (as defined in the regulations) to risk-weighted assets, and of Tier
1 capital to average assets as illustrated in the following table. Management
believes, as of March 31, 2007, that each entity meets all capital adequacy
requirements to which they are subject.  Additionally, as of March 31, 2007,
the Bank was categorized as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the institution's category.

                                                                To Be Well
                                                                Capitalized
                                                                Under Prompt
                                             For Capital         Corrective
                              Actual      Adequacy Purposes  Action Provisions
                          --------------  -----------------  -----------------
                          Amount   Ratio   Amount     Ratio   Amount   Ratio
                          ------   -----   ------     -----   ------   -----
As of March 31, 2007
 (in thousands)
Total Capital
 (to Risk Weighted
 Assets)
   Consolidated          $136,606  12.03%  $90,870   >8.00%    N/A
   Horizon Bank          $136,337  12.00%  $90,862   >8.00%  $113,578  >10.00%
Tier I Capital
 (to Risk Weighted
 Assets)
   Consolidated          $119,942  10.56%  $45,435   >4.00%    N/A
   Horizon Bank          $119,674  10.54%  $45,431   >4.00%  $68,147    >6.00%
Tier I Capital
 (to Average Assets)
   Consolidated          $119,942   9.64%  $49,751   >4.00%    N/A
   Horizon Bank          $119,674   9.63%  $49,728   >4.00%  $62,160    >5.00%

                                                                To Be Well
                                                                Capitalized
                                                                Under Prompt
                                             For Capital         Corrective
                              Actual      Adequacy Purposes  Action Provisions
                          --------------  -----------------  -----------------
                          Amount   Ratio   Amount     Ratio   Amount   Ratio
                          ------   -----   ------     -----   ------   -----
As of March 31, 2006
 (in thousands)
Total Capital
 (to Risk Weighted
 Assets)
   Consolidated          $124,523  12.63%  $78,861   >8.00%    N/A
   Horizon Bank          $124,365  12.62%  $78,861   >8.00%  $98,576   >10.00%
Tier I Capital
 (to Risk Weighted
 Assets)
   Consolidated          $109,435  11.10%  $39,431   >4.00%    N/A
   Horizon Bank          $109,277  11.09%  $39,430   >4.00%  $59,146    >6.00%
Tier I Capital
 (to Average Assets)
   Consolidated          $109,435  10.03%  $43,655   >4.00%    N/A
   Horizon Bank          $109,277  10.02%  $43,633   >4.00%  $54,541    >5.00%

Holding Company Loans - Under federal regulations, the Bank is limited, unless
previously approved, as to the amount it may loan to the holding company and
any one affiliate, to 10% of its capital stock and surplus, and the total of
loans to the holding company and affiliates must not exceed 20% of capital and
surplus. Further, all such loans must be fully collateralized. In addition,
dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
capital requirements.

Dividend Reinvestment Plan - As a service to its stockholders of record, the
Bank offers a Dividend Reinvestment and Stock Purchase Plan ("Reinvestment
Plan"). Under the terms of the Reinvestment Plan, dividends and optional cash
payments may be reinvested toward the purchase of additional shares of stock.
No brokerage commission or fees are charged to acquire shares through the
Reinvestment Plan.

                                         83

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 12 - STOCKHOLDERS' EQUITY (Continued)

Stock Repurchase Plans - The Company has conducted various stock buy-back
programs since August 1996. In March 2004, the Company announced a plan to
repurchase up to 1,300,000 shares, or approximately 10% of the Company's
outstanding common stock. During fiscal 2005, 563,600 shares were repurchased
and subsequently retired at a cost of $8,687,765. In March 2005, the Company
announced a plan to repurchase up to 1,250,000 shares, or approximately 10% of
the Company's outstanding common stock. During fiscal 2006, 266,065 shares
were repurchased and subsequently retired at a cost of $4,377,704. In March
2006, the Company announced a plan to repurchase up to 625,000 shares, or
approximately 5% of the Company's outstanding common stock. During fiscal
2007, 144,580 shares were repurchased and subsequently retired at a cost of
$2,942,428. Share information related to stock repurchases has been restated
to reflect stock splits and dividends.

Stock Split - The Company's Board of Directors, at it's September 26, 2006
Board meeting, announced a 5 for 4 stock split paid in the form of a 25% stock
dividend to be issued October 23, 2006 for shareholders of record October 6,
2006.

NOTE 13 - EARNINGS PER SHARE

The numerators and denominators, adjusted for stock splits and dividends, of
basic and diluted earnings per share are as follows:

                                          2007          2006         2005
                                      -----------   -----------   -----------
                                               (Dollars in Thousands)

Net income (numerator)                $    19,028   $    15,655   $    13,063
Shares used in the calculation
 (denominators)
   Basic earnings per weighted
    average share outstanding          12,287,805    12,422,000    12,765,238
   Effect of dilutive stock options       121,287       120,845       187,304
                                      -----------   -----------   -----------
   Diluted shares                      12,409,092    12,542,845    12,952,542
                                      ===========   ===========   ===========

Basic earnings per share                  $1.55         $1.26         $1.02
                                          =====         =====         =====

Diluted earnings per share                $1.53         $1.25         $1.01
                                          =====         =====         =====

At March 31, 2007, 2006, and 2005, there were options to purchase 184,475,
187,236, and 273,215 shares of common stock outstanding. As of March 31, 2007,
2006, and 2005, all options to purchase shares of common stock were included
in the diluted net income per share calculation.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Employment Agreement - The Company has entered into employment agreements with
members of senior management that provide for potential payments upon change
in control, disability, termination without cause, or death.  The arrangements
generally provide severance payments at 2.99 times the then current
compensation levels and continuation of certain benefits.

                                         84
<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)

Long-Term Lease Commitments - The Company has entered into lease agreements
for certain parcels of land and branch offices. Future noncancelable lease
payments under these agreements are as follows for the years ending March 31:

                                                (Dollars in
                                                 Thousands)
                                                 ----------
                     2008                          $  381
                     2009                             273
                     2010                             239
                     2011                             243
                     2012                             186
                  Thereafter                          111
                                                   ------
                                                   $1,433
                                                   ======

Rent expense charged to operations was $293,000, $294,000, and $267,000 for
the years ended March 31, 2007, 2006, and 2005.

NOTE 15 - RELATED PARTY TRANSACTIONS

Certain directors, executive officers, and principal stockholders are Bank
customers and have had banking transactions with the Bank. All loans and
commitments to loan included in such transactions were made in compliance with
applicable laws on substantially the same terms (including interest rates and
collateral) as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility
or present any other unfavorable features.

The aggregate balances and activity during 2007 and 2006, are as follows and
were within regulatory limitations:
                                           2007           2006
                                         -------        -------
                                         (Dollars in Thousands)

Balance, beginning of year               $15,528        $14,518
New loans or advances                      5,155          8,975
Repayments                                (7,178)        (7,965)
                                         -------        -------
Balance, end of year                     $13,505        $15,528
                                         =======        =======
Interest earned on loans                 $ 1,130        $ 1,071
                                         =======        =======

Deposits from related parties totaled approximately $3.8 million and $3.6
million at March 31, 2007 and 2006, respectively.

The Company leases office space from a limited partnership in which one of the
Company's directors is a part owner.  Lease expense for this office space was
$151,000, $123,000, and $114,000 for the fiscal years ended March 31, 2007,
2006, and 2005, respectively.  The future commitments related to this lease
are included in the totals disclosed in Note 14 regarding Long-Term Lease
Commitments.

NOTE 16 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Bank's business activity is with customers located within Whatcom,
Skagit, Snohomish, and Pierce Counties. Investments in state and municipal
securities involve governmental entities within the state of Washington. The
Bank originates commercial, real estate, and consumer loans. Generally, loans
are secured by deposit accounts, personal property, or real estate. Rights to
collateral vary and are legally documented to the extent practicable. Although
the Bank has a diversified loan portfolio, local economic conditions may
affect borrowers' ability to meet the stated repayment terms.

                                         85

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 17 - FINANCIAL INSTRUMENTS

The Bank is a party to financial instruments with off-balance-sheet risk (loan
commitments) in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in interest
rates. Loan commitments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the balance sheet.
The contract amounts of those commitments reflect the extent of the Bank's
exposure to credit loss from these commitments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.

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

Unfunded commitments under commercial lines-of-credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines-of-credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. Except
for certain long-term guarantees, the majority of guarantees expire in one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Collateral
supporting those commitments, for which collateral is deemed necessary,
generally amounts to 100% of the commitment amount at March 31, 2007.

The Bank has not been required to perform on any financial guarantees and has
not incurred any losses on its commitments for the years ended March 31, 2007,
2006, and 2005.

The following is a summary of the off-balance-sheet financial instruments or
contracts outstanding at March 31:

                                                 2007         2006
                                                ------       ------
                                               (Dollars in Thousands)

Commitments to extend credit                   $383,458     $286,188
Credit card arrangements                         10,105        9,775
Standby letters of credit                         3,056        5,237

NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
the following classes of financial instruments:

Cash Equivalents and Interest-Bearing Deposits - Due to the relatively short
period of time between the origination of these instruments and their expected
realization, the carrying amount is estimated to approximate fair value.

Investment and Mortgage-Backed Securities - Fair values are based on quoted
market prices or dealer quotes, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.

                                         86

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Federal Home Loan Bank Stock - FHLB Stock is carried at $100 par value. This
investment is considered restricted, as a minimum investment must be
maintained in order to obtain borrowing commitments from FHLB. The Company may
redeem its investment only at par value, which is used as the estimated market
value.

Loan Receivables and Investment in Real Estate in a Joint Venture - For
certain homogeneous categories of loans, such as those written to FHLMC
standards, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.

Loans Held for Sale - The fair value of loans held for sale is based on the
estimated value at which the loans could be sold in the secondary market.

Accrued Income and Expense Accounts - Due to the short-term nature of these
amounts, recorded book value is believed to approximate fair value.

Deposit Liabilities, Repurchase Agreements, Other Borrowed Funds, and
Borrowing Related to Investment in Real Estate in a Joint Venture - The fair
value of demand deposits, savings accounts, certain money market deposits, and
federal funds purchased, is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit, repurchase
agreements and other borrowed funds are estimated by discounting the estimated
future cash flows using the rates currently offered for these instruments with
similar remaining maturities.

Off-Balance-Sheet Instruments - The Company's off-balance-sheet instruments
include unfunded commitments to extend credit and borrowing facilities
available to the Company. The fair value of these instruments is not
considered practicable to estimate because of the lack of quoted market price
and the inability to estimate fair value without incurring excessive costs.

The carrying amounts and estimated fair values of the Bank's financial
instruments at March 31, are as follows:

                                        2007                     2006
                               ----------------------   ---------------------
                               Carrying                 Carrying
                                Amount     Fair Value    Amount    Fair Value
                               --------    ----------   --------   ----------
                                         (Dollars in Thousands)

Financial Assets
  Cash and cash equivalents   $   40,833  $   40,833   $ 24,190    $ 24,190
  Interest-bearing deposits        5,379       5,379      9,439       9,439
  Investment securities           53,235      53,237     60,507      60,511
  Mortgage-backed securities      26,381      26,390     23,833      23,848
  Federal Home Loan Bank stock     7,247       7,247      7,247       7,247
  Loans receivable             1,054,870   1,049,670    918,510     912,192
  Loans held-for-sale              4,493       4,493      5,252       5,252
  Investment in real estate
   in a joint venture             17,169      17,169     16,928      16,928
  Accrued interest and
   dividends receivable            6,626       6,626      5,185       5,185

Financial Liabilities
  Demand and savings deposits    379,537     379,537    348,227     348,227
  Time deposits                  595,758     590,370    486,072     483,555
  Other liabilities                6,058       6,058      4,917       4,917
  Accrued interest payable         3,450       3,450      2,002       2,002
  Other borrowed funds           138,715     138,009    141,561     139,926
  Borrowing related to
   investment in real estate
   in a joint venture             20,243      20,243     18,276      18,276

                                         87

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 19 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION

Condensed balance sheet at March 31:

                                      2007         2006
                                    --------     --------
                                    (Dollars in Thousands)

Cash                                $    138     $    151
Investment in Bank                   123,586      113,165
Other assets                           1,663        1,442
                                    --------     --------
                                    $125,387     $114,758
                                    ========     ========

Other liabilities                   $  1,532     $  1,435
Stockholders' equity                 123,855      113,323
                                    --------     --------
                                    $125,387     $114,758
                                    ========     ========

Condensed statement of income for the years ended March 31, 2007, 2006, and
2005:
                                             2007        2006        2005
                                           -------     -------      -------
                                                (Dollars in Thousands)
Income
  Cash dividends from Bank subsidiary      $ 9,149     $ 9,981      $14,081
  Interest                                       -           2            3
                                           -------     -------      -------
     Total income                            9,149       9,983       14,084
                                           -------     -------      -------
Expenses
  Compensation                                 426         164          126
  Other                                        372         346          237
                                           -------     -------      -------
     Total expenses                            798         510          363
                                           -------     -------      -------
Income before undistributed income of
 subsidiary and benefit equivalent to
 income taxes                                8,351       9,473       13,721
Benefit equivalent to income taxes             279         178          123
                                           -------     -------      -------
Income before undistributed income of
 subsidiary                                  8,630       9,651       13,844
Undistributed income of subsidiary          10,398       6,004         (781)
                                           -------     -------      -------
     Net income                            $19,028     $15,655      $13,063
                                           =======     =======      =======

                                         88

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 19 - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (Continued)

                                             2007        2006        2005
                                           -------     -------      -------
                                               (Dollars in Thousands)

Cash flows from operating activities
  Net income                              $ 19,028     $15,655     $ 13,063
Adjustments to reconcile net income to
 net cash flows from operating activities
    Equity in undistributed income of
     subsidiary                            (10,398)     (6,004)         781
    Other operating activities                 127         (66)        (345)
                                          --------     -------     --------
      Net cash flows from operating
       activities                            8,757       9,585       13,499
                                          --------     -------     --------
Cash flows from investing activities
  Other investing activities                     -          22           22
                                          --------     -------     --------
      Net cash flows from investing
       activities                                -          22           22
                                          --------     -------     --------
Cash flows from financing activities
  Sale of common stock                         149         464          497
  Dividends paid                            (5,977)     (5,572)      (5,328)
  Treasury stock purchased                  (2,942)     (4,378)      (8,688)
                                          --------     -------     --------
      Net cash flows from financing
       activities                           (8,770)     (9,486)     (13,519)
                                          --------     -------     --------
Net change in cash                             (13)        121            2
Cash, beginning of year                        151          30           28
                                          --------     -------     --------
Cash, end of year                         $    138     $   151     $     30
                                          ========     =======     ========


NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS) (Unaudited)

                                       Year Ended March 31, 2007
                         -----------------------------------------------------
                         1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
                         -----------   -----------   -----------   -----------
                                         (Dollars in Thousands)

Interest income            $21,183       $22,993       $24,299       $24,125
Interest expense             8,501         9,860        10,877        10,895
                           -------       -------       -------       -------
Net interest income         12,682        13,133        13,422        13,230
Provision for loan losses      700           700           450             -
Noninterest income           1,474         1,437         1,419         1,508
Noninterest expense          6,550         6,876         7,054         7,381
                           -------       -------       -------       -------
Income before provision
 for income tax              6,906         6,994         7,337         7,357
Provision for income tax     2,324         2,344         2,454         2,444
                           -------       -------       -------       -------
Net income                 $ 4,582       $ 4,650       $ 4,883       $ 4,913
                           =======       =======       =======       =======

Basic earnings per share
 (adjusted for stock
 splits and dividends)     $  0.37       $  0.38       $  0.40       $  0.40
                           =======       =======       =======       =======

Diluted earnings per
 share (adjusted for
 stock splits and
 dividends)                $  0.37       $  0.37       $  0.39       $  0.40
                           =======       =======       =======       =======

                                         89

<PAGE>



                                                       HORIZON FINANCIAL CORP.
                                                 NOTES TO FINANCIAL STATEMENTS
                                                MARCH 31, 2007, 2006, AND 2005
------------------------------------------------------------------------------

NOTE 20 - SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS) (Unaudited)
(Continued)

                                     Year Ended March 31, 2006
                         -----------------------------------------------------
                                       (Dollars in Thousands)

                         1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
                         -----------   -----------   -----------   -----------

Interest income            $15,536       $16,666       $18,194       $18,992
Interest expense             5,262         5,908         6,604         7,122
                           -------       -------       -------       -------
Net interest income         10,274        10,758        11,590        11,870
Provision for loan losses      725           750           800           300
Noninterest income           1,544         1,439         1,487           941
Noninterest expense          5,864         5,991         6,477         6,438
                           -------       -------       -------       -------
Income before provision
 for income tax              5,229         5,456         5,800         6,073
Provision for income tax     1,516         1,661         1,817         1,909
                           -------       -------       -------       -------
Net income                 $ 3,713       $ 3,795       $ 3,983       $ 4,164
                           =======       =======       =======       =======

Basic earnings per share
 (adjusted for stock
 splits and dividends)     $  0.30       $  0.30       $  0.32       $  0.34
                           =======       =======       =======       =======

Diluted earnings per
 share (adjusted for
 stock splits and
 dividends)                $  0.30       $  0.30       $  0.32       $  0.33
                           =======       =======       =======       =======

                                         90

<PAGE>



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

         Not applicable.

Item 9A.  Controls and Procedures
---------------------------------

    (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Corporation's disclosure controls and procedures (as defined in Rule
13(a)-15(e) of the Exchange Act was carried out under the supervision and with
the participation of the Corporation's Chief Executive Officer, Chief
Financial Officer and several other members of the Corporation's senior
management as of the end of the period covered by this report.  The
Corporation's Chief Executive Officer and Chief Financial Officer concluded
that the Corporation's disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Corporation in the reports it files or submits under the Exchange Act
is (i) accumulated and communicated to the Corporation's management (including
the Chief Executive Officer and Chief Financial Officer) in a timely manner,
and (ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.

    (b) Changes in Internal Controls: There have been no changes in our
internal control over financial reporting (as defined in 13a-15(f) of the Act)
that occurred during the quarter ended March 31, 2007, that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. The Corporation continued, however, to implement
suggestions from its internal auditor and independent auditors on ways to
strengthen existing controls.  The Corporation does not expect that its
disclosure controls and procedures and internal controls over financial
reporting will prevent all error and fraud.  A control procedure, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control procedure are met.  Because of
the inherent limitations in all control procedures, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Corporation have been detected.  These inherent limitations
include the realities that judgements in decision-making can be faulty, and
that breakdowns in controls or procedures can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control.  The design of any control procedure is based in part upon
certain assumptions about the likelihood of future events and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate.  Because of the inherent limitations in
cost-effective control procedures, misstatements due to error or fraud may
occur and not be detected.

    (c) Management's Annual Report on Internal Control over Financial
Reporting.  Management's report and the independent registered public
accounting firm's attestation report are included in Item 8 of this Annual
Report on Form 10-K for the year ended March 31, 2007 under the captions
entitled "Management's Annual Report on Internal Control over Financial
Reporting" and " Report of Independent Registered Public Accounting Firm."

    The Corporation intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future.  The goal is to ensure that senior management has
timely access to all material financial and non-financial information
concerning the Corporation's business.  While the Corporation believes the
present design of its disclosure controls and procedures is effective to
achieve its goal, future events affecting its business may cause the
Corporation to modify its disclosure controls and procedures.

Item 9B.  Other Information
---------------------------

    There was no information to be disclosed by the Corporation in a current
report on Form 8-K during the fourth quarter of fiscal 2007 that was not so
disclosed.

                                        91

<PAGE>



                                     PART III

Item 10.  Directors, Executive Officers and Corporate Governance
----------------------------------------------------------------

Directors and Executive Officers

    The information contained under the section captioned "Proposal I --
Election of Directors" is included in the Company's Definitive Proxy Statement
for the 2007 Annual Meeting of Stockholders ("Proxy Statement") and is
incorporated herein by reference.

    For information regarding the executive officers of the Corporation and
the Bank, see the information contained herein under the section captioned
"Item 1.  Business - Personnel - Executive Officers of the Registrant."

Audit Committee Financial Expert

    The Audit Committee of the Corporation is composed of Directors Fred R.
Miller (Chairman), James A. Strengholt and Robert C. Tauscher.  Each member of
the Audit Committee is "independent" as defined in the NASDAQ Stock Market
listing standards.  The Corporation's Board of Directors has determined that
there is no "audit committee financial expert," as defined in the SEC's
Regulation S-K.  The Board believes that the current members of the Audit
Committee are qualified to serve based on their experience and background.

Code of Ethics

    The Board of Directors have adopted Officer and Director Codes of Ethics.
The Codes are applicable to each of the Corporation's directors and officers,
including the principal executive officer and senior financial officers, and
requires individuals to maintain the highest standards of professional
conduct.   A copy of the Code of Ethics applicable to the principal executive
officer and senior financial officers is filed as an exhibit to this Annual
Report on Form 10-K.  The Corporation has not made the Codes of Ethics
available on its website.  The Corporation will provide a copy of the Codes of
Ethics free of charge upon request.

Compliance with Section 16(a) of the Exchange Act

    The information contained under the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" is included in the Corporation's
Proxy Statement and is incorporated herein by reference.

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

    Information regarding management and director compensation and
transactions with management and others is incorporated by reference to the
section captioned "Executive Compensation" and "Director's Compensation" in
the Proxy Statement.

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

    (a)   Security Ownership of Certain Beneficial Owners.

    The information contained under the section captioned "Security Ownership
of Certain Beneficial Owners and Management" is included in the Corporation's
Proxy Statement and is incorporated herein by reference.

    (b)   Security Ownership of Management

    The information contained under the sections captioned "Security Ownership
of Certain Beneficial Owners and Management" and "Proposal I -- Election of
Directors" is included in the Corporation's Proxy Statement and are
incorporated herein by reference.

                                       92

<PAGE>



    (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.

    (d)   Equity Compensation Plan Information

    The following table summarizes share and exercise price information about
the Corporation's equity compensation plans as of March 31, 2007.

                                                                 Number of
                                                                securities
                                                                 remaining
                                                               available for
                          Number of                           future issuance
                         securities                            under equity
                        to be issued      Weighted-average     compensation
                       upon exercise of   exercise price     plans (excluding
                         outstanding      of outstanding        securities
                      options, warrants  options, warrants     reflected in
Plan category             and rights        and rights          column (a))
--------------------  -----------------  -----------------  ------------------
                             (a)                (b)                 (c)
Equity compensation
 plans approved by
 security holders:
  1995 Stock Option
  and Incentive
  Plan.............         143,692             7.67                   --
  2005 Incentive
  Stock Plan.......          40,783            18.46              862,013

Equity compensation
 plans not approved
 by security
 holders...........              --
                          ---------           ------             --------
  Total............         184,475            10.06              862,013
                          =========           ======             ========

Item 13.  Certain Relationships and Related Transactions, and Director
Independence
---------------------------------------------------------------------

    The information contained under the sections captioned "Meetings and
Committees of the Board of Directors and Corporate Governance -- Corporate
Governance -- Related Party Transactions" and "Meetings and Committees of the
Board of Directors and Corporate Governance Matters -- Corporate Governance --
Director Independence" are included in the Company's Proxy Statement and are
incorporated herein by reference.

Item 14.  Principal Accounting Fees and Services
------------------------------------------------

    The information contained under the section captioned "Independent
Auditors" is included in the Corporation's Proxy Statement and is incorporated
herein by reference.

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules
----------------------------------------------------

(a)    Exhibits
       --------

         3.1   Articles of Incorporation of Horizon Financial, Corp.
               (incorporated by reference to Exhibit 3.1 to the Registrant's
               Current Report on Form 8-K dated October 13, 1995)

         3.2   Bylaws of Horizon Financial Corp. (incorporated by reference to
               Exhibit 3.2 to the Registrant's Current Report on Form 8-K
               dated October 13, 1995)

        10.1   Amended and Restated Employment Agreement with V. Lawrence
               Evans (incorporated by reference to the Registrant's Annual
               Report on Form 10-K for the year ended March 31, 1996)

        10.2   Deferred Compensation Plan (incorporated by reference to the
               Registrant's Annual Report on Form 10-K for the year ended
               March 31, 1996)

                                        93

<PAGE>



        10.3   1986 Stock Option and Incentive Plan (incorporated by reference
               to Exhibit 99.1 to the Registrant's Registration Statement on
               Form S-8 (File No. 33-99780))
        10.4   1995 Stock Option Plan (incorporated by reference to Exhibit
               99.2 to the Registrant's Registration Statement on Form S-8
              (File No. 33-99780))
        10.5   Bank of Bellingham 1993 Employee Stock Option Plan
              (incorporated by reference to Exhibit 99 to the Registrant's
               Registration Statement on Form S-8 (File No. 33-88571))
        10.6   Severance Agreement with Dennis C. Joines (incorporated by
               reference to the  Registrant's Annual Report on Form 10-K for
               the year ended March 31, 2002)
        10.7   Severance Agreement with Richard P. Jacobson (incorporated by
               reference to the Registrant's Quarterly Report on Form 10-Q for
               the quarter ended June 30, 2002)
        10.8   Severance Agreement with Steve Hoekstra (incorporated by
               reference to the Registrant's Quarterly Report on Form 10-Q for
               the quarter ended June 30, 2002)
        10.9   Stock Incentive Plan (incorporated by reference to Exhibit 99
               to the Registrant's Registration Statement on Form S-8 (File
               No. 333-127178))
        10.10  Form of Incentive Stock Option Award Agreement under the 2005
               Stock Incentive Plan (incorporated by reference to Exhibit 99.1
               contained in the Registrant's Current Report on Form 8-K dated
               July 27, 2005)
        10.11  Form of Non-qualified Stock Option Award Agreement under the
               2005 Stock Incentive Plan (incorporated by reference to Exhibit
               99.1 contained in the Registrant's Current Report on Form 8-K
               dated July 27, 2005)
        10.12  Form of Restricted Stock Award Agreement under the 2005 Stock
               Incentive Plan (incorporated by reference to Exhibit 99.1
               contained in the Registrant's Current Report on Form 8-K dated
               July 27, 2005)
        14     Code of Ethics
        21     Subsidiaries of the Registrant
        23     Consent of Moss Adams LLP, Independent Registered Public
               Accounting Firm
        31.1   Certification of Chief Executive Officer Pursuant to Section
               302 of the Sarbanes-Oxley Act
        31.2   Certification of Chief Financial Officer Pursuant to Section
               302 of the Sarbanes-Oxley Act
        32     Certification of Chief Executive Officer and Chief Financial
               Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

    (b) Financial Statement Schedules

        The Consolidated Financial Statements and Notes thereto are included
in Item 8 of this Form 10-K.

                                        94

<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 13, 2007                    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 13, 2007                    Date:   June 13, 2007


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

Date:  June 13, 2007                     Date:   June 13, 2007


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

Date:  June 13, 2007                     Date:  June 13, 2007


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

Date: June 13, 2007                      Date: June 13, 2007


                                        95

<PAGE>





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

Date: June 13, 2007                      Date: June 13, 2007

                                         96

<PAGE>




                                  EXHIBIT INDEX

Exhibit  14     Code of Ethics

Exhibit  21     Subsidiaries of the Registrant

Exhibit  23     Consent of Moss Adams LLP, Independent Registered Public
                Accounting Firm

Exhibit  31.1   Certification of Chief Executive Officer Pursuant to Section
                302 of the Sarbanes-Oxley Act

Exhibit  31.2   Certification of Chief Financial Officer Pursuant to Section
                302 of the Sarbanes-Oxley Act

Exhibit  32     Certification of Chief Executive Officer and Chief Financial
                Officer Pursuant to Section 906 of the Sarbanes-Oxley Act


<PAGE>



                                    Exhibit 14

                                  Code of Ethics

<PAGE>




                              CODE OF ETHICS FOR
                        OFFICER, DIRECTOR AND EMPLOYEE
                          (HORIZON FINANCIAL CORP)

The Business of Horizon Financial Corp.

The business of Horizon Financial Corp. ("Horizon") and its affiliates
includes a full array of retail banking and related services. During the
performance of our duties, it is necessary to interact with customers,
suppliers and professional groups. These groups place their trust in us and
accordingly, we have the responsibility to keep this trust and be in strict
compliance with all applicable laws and regulations.

Horizon requires corporate and affiliate officers, directors, and employees to
observe a high standard of ethics in business and personal matters. The
following Code of Ethics specifies certain standards for the guidance of all
officers, directors and employees. The Code should be considered as
illustrative, but not regarded as all-inclusive.

Failure to comply with all policies and procedures may result in disciplinary
action, up to and including termination of employment. Any questions regarding
proper code of conduct should be referred to the Corporation's Human Resources
Department.

Conflict of Interest/Outside Interests

All officers, directors and employees should avoid situations which could
result in, or give the appearance of, a conflict of interest concerning either
Horizon or its stockholders, or any affiliate or its customers. Personal
interest which could affect the proper exercise of judgment must be avoided.
In those cases where personal interests do exist, or may appear to exist, the
officer, director or employee in question should disqualify himself or herself
and permit other members of our staff to handle the transaction.

In determining whether a conflict of interest could exist, officers, directors
and employees should remember that the rules also apply to their spouses and
adult children, where appropriate. For example, a conflict of interest would
arise where the spouse of an employee was offered a business opportunity on
account of the employee's position at Horizon.

Having a business or other employment outside Horizon is permissible provided
that it does not conflict with the officer or employee's duties or the time
and attention required of his or her position at Horizon. Also, the business
or employment cannot be directly competitive with Horizon.

Acceptance of membership on outside boards involves possible conflicts of
interest. Officers, directors, and employees are encouraged to participate in
civic, charitable and religious organizations; any other such organization, or
position therewith, should be authorized by appropriate management.
Situations which might be in conflict with this policy should be cleared with
Human Resources.


                                       1

<PAGE>



Confidential Information

The confidential nature of bank accounts and company resources in general is a
fundamental precept in financial services. It is important that our officers,
directors and employees be constantly alert to the responsibility of
maintaining confidentiality.

All information obtained by virtue of employment with Horizon should be held
in strictest confidence. This includes financial and personal information of
customers, including fellow employees, as well as Horizon's financial
information and information related to its internal affairs, competitive
position, strategic planning and regulator actions. Confidential information
must not be disclosed to anyone except as required for business transactions
or as required by law.

Confidential information pertaining to Horizon or its customers, suppliers,
stockholders and employees is to be used solely for corporate purposes and not
as a basis for personal gain by officers, directors, or employees.

In certain instances, confidential information could be considered "insider
information" within the meaning of federal and state securities laws.
Disclosure or use of such information for personal gain or for avoiding
personal loss could result in substantial civil and criminal penalties to
individuals who disclose or who use this information. Officers and employees
must be extremely cautious in discussing the corporate affairs of Horizon with
its customers or with outsiders, including with stockholders of Horizon who do
not have a right to such information before an announcement is made to all
stockholders of Horizon.

Trading in Horizon's Stock

Officers and employees are encouraged to participate and maintain ownership in
the stock of Horizon. While there are occasions that dictate the purchase or
sale of any investment, active buying and selling of Horizon's common stock in
order to make short term profits is discouraged. Officers and employees are
cautioned that the Securities and Exchange Commission has stringent rules and
regulations related to trading securities while in the possession of material,
non-public information.

There may be occasions when, in the course of your normal duties, you become
aware of certain facts related to Horizon such as earnings, expansion plans,
potential acquisition or other similar situations which may reasonably be
expected to be important to the investing public. Insider information is
information that has not been publicly released and which a reasonable person
would consider important in determining whether to buy, sell or hold
securities. Until such information is disseminated to the general public
through a press release or other public announcement, officers and employees
are prohibited from either purchasing or selling Horizon's stock. Violation of
this policy could subject officers or employees to possible action by the
Securities and Exchange Commission, the result of which may include fines
and/or imprisonment. More detailed information in this regard is contained in
the Corporation's Insider Trading Guidelines.

Gifts and Entertainment

In the matter of gratuities to officers or employees, circumstances must
govern. Substantial gifts and excessive entertainment from our customers and
suppliers should be courteously and tactfully declined. Commissions, fees or
propositions involving personal gain to an

                                       2

<PAGE>



officer or employee in connection with the handling of a transaction are
highly improper and in some cases, illegal.

No officer or employee or member of his or her immediate family should give or
accept cash, gifts, special accommodations or other favors from anyone with
whom the person is negotiating, soliciting or doing business with on behalf of
Horizon. Similarly, officers and employees may not solicit or accept personal
fees, commissions or other forms of remuneration because of any transaction or
business involving Horizon.

The preceding prohibitions are not applicable to entertainment or hospitality
of a reasonable value, or gifts (but never cash), which under the
circumstances, are of limited or nominal value. The acceptance of gifts of
more than a nominal value could be considered as an attempt at bribery and
could subject both the giver and the recipient to felony charges as well as
the penalties prescribed under the Bank Bribery Act. 18 U.S.C. Section 215.
The Bank Bribery Act also covers agents or attorneys of a financial
institution.

Full and timely disclosure to a supervisor must be made with respect to
entertainment, hospitality or gifts received. Any question or doubt as to the
appropriateness of their receipt should be referred to the Corporation's Human
Resources Manager. If necessary, personnel in the human resources department
will consult with legal counsel in this regard. The tactful communication of
the limitations of this policy to the donors of gifts is also strongly
encouraged.

Personal Reputation

Loyalty, fidelity and good morals are assumed qualities of those who represent
Horizon but, nevertheless, need to be emphasized. It is imperative that each
individual display conduct at all times so as to reflect credit on Horizon and
its directors, officers and employees. A reputation for good morals, ethics
and integrity is within the reach of all, and officers and employees must
remain above reproach throughout their business career.

Community and Political Activity

As an institution, Horizon cannot and should not engage in politics. Officers
and employees, however, are encouraged to stay well informed on local, state
and national affairs and to meet their responsibility to vote in all
elections. Officers and employees should ensure that their participation in
political activities in no way reflects unfavorably on Horizon. Community and
political activities by officers and employees are encouraged, provided that
participation:

     *  is accomplished in a legal manner;
     *  does not interfere with work performance for Horizon; and
     *  occurs in such a manner which clearly indicates that the officer or
        employee does not speak for Horizon.

Before running for an elected political office or accepting an appointment to
a federal, state or local government office, the officer or employee must
discuss the position with Horizon's Chief Executive Officer.

Federal law prohibits Horizon from making political contributions to parties
or candidates. The use of any corporate funds, supplies, special services,
equipment or labor for political purposes must be avoided as such use is
illegal. Additionally, no reimbursement will be

                                       3

<PAGE>



made to any individual for political contributions or for the cost of
attendance at any political function. Fund-raising efforts for any purpose
should be avoided if there is any possibility of an adverse effect on the
reputation of Horizon.

Illegal Activity

Officers, directors and employees are expected to abide by all local, state
and federal laws, regulations and guidelines. Officers or employees engaged in
activities found to be in conflict with and against these laws, regulations or
guidelines will be subject to disciplinary action, up to and including
termination of employment. Examples of illegal activity include, but are not
limited to:

     *  embezzlement;
     *  unauthorized sale of information;
     *  frauds such as forgery, counterfeiting and check kiting;
     *  unauthorized use of funds, revenues and fees;
     *  abuse of expense, asset and liability accounts; and
     *  sexual harassment or discrimination.

In addition, any officer or employee who is charged with, or is entering into
a pretrial diversion or similar program for, any crime involving breach of
trust, dishonesty, money laundering, a drug-related offense, a crime of
violence or a felony must immediately notify the Corporation's Chief Executive
Officer.

Integrity

Horizon presents its organization honestly to its officers and employees, and
in turn, expects officers and employees to be honest in their dealings with
Horizon,its customers and fellow employees. We expect people to be honest in
their handling of money, merchandise and property with which they are
entrusted. Officers and employees are also expected to be honest with respect
to the time, effort and complete performance of their jobs as well as when
dealing with others. The vast majority of officers and employees are of high
ethical character; however, if a dishonest individual is discovered, the
individual will be dealt with quickly and effectively.


                                       4


Board Approved 07/2006


<PAGE>




                                   Exhibit 21

                           Subsidiaries of the Registrant



Parent
------

Horizon Financial Corp.


                                                         Jurisdiction
                               Percentage                or State of
Subsidiaries (a)              of Ownership               Incorporation
----------------              ------------               -------------

Horizon Bank                      100%                     Washington

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


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

(b)   Wholly-owned subsidiary of Horizon Bank.


<PAGE>



                                  Exhibit 23

             Consent of Independent Registered Public Accounting Firm

<PAGE>



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Horizon Financial Corp. and Subsidiary

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 1995
Stock Option Plan and the Registration Statement on Form S-8 (No. 333-127178)
pertaining to the Horizon Financial Corp. 2005 Incentive Stock Plan; of our
report dated June 13, 2007 relating to the consolidated statement of financial
position of Horizon Financial Corp. and Subsidiary as of March 31, 2007 and
2006, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended March 31,
2007, and in our same report, with respect to Horizon Financial Corp. and
Subsidiary management's assessment of the effectiveness of internal control
over financial reporting and the effectiveness of internal control over
financial reporting, appearing in this Annual Report on Form 10-K of Horizon
Financial Corp. and Subsidiary, for the year ended March 31, 2007.

/s/Moss Adams LLP

Everett, Washington
June 13, 2007

<PAGE>



                                  Exhibit 31.1

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

I, V. Lawrence Evans, certify that:

1     I have reviewed this Annual Report on Form 10-K of Horizon Financial
      Corp.;

2     Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make
      the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered
      by this report;

3     Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows
      of the registrant as of, and for, the periods presented in this report;

4     The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known
          to us by others within those entities, particularly during the
          period in which this report is being prepared;

      b)  Designed such internal control over financial reporting, or caused
          such internal control over financial reporting to be designed under
          our supervision, to provide reasonable assurance regarding the
          reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with generally
          accepted accounting principles;

      c)  Evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about
          the effectiveness of the disclosure controls and procedures, as of
          the end of the period covered by this report based on such
          evaluation; and

      d)  Disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the
          registrant's most recent fiscal quarter (the registrant's fourth
          fiscal quarter in the case of an annual report) that has materially
          affected, or is reasonably likely to materially affect, the
          registrant's internal control over financial reporting; and

5     The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)  All significant deficiencies and material weaknesses in the design
          or operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and


      b)  Any fraud, whether or not material, that involves management or
          other employees who have a significant role in the registrant's
          internal control over financial reporting.


Date: June 13, 2007                     /s/V. Lawrence Evans
                                        ------------------------------
                                        V. Lawrence Evans
                                        Chief Executive Officer and President

<PAGE>



                                 Exhibit 31.2

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

I, Richard P. Jacobson, certify that:

1     I have reviewed this Annual Report on Form 10-K of Horizon Financial
      Corp.;


2     Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make
      the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered
      by this report;

3     Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows
      of the registrant as of, and for, the periods presented in this report;

4     The registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known
          to us by others within those entities, particularly during the
          period in which this report is being prepared;

      b)  Designed such internal control over financial reporting, or caused
          such internal control over financial reporting to be designed under
          our supervision, to provide reasonable assurance regarding the
          reliability of financial reporting and the preparation of financial
          statements for external purposes in accordance with generally
          accepted accounting principles;

      c)  Evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about
          the effectiveness of the disclosure controls and procedures, as of
          the end of the period covered by this report based on such
          evaluation; and

      d)  Disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the
          registrant's most recent fiscal quarter (the registrant's fourth
          fiscal quarter in the case of an annual report) that has materially
          affected, or is reasonably likely to materially affect, the
          registrant's internal control over financial reporting; and

5     The registrant's other certifying officer(s) and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of the
      registrant's board of directors (or persons performing the equivalent
      functions):

      a)  All significant deficiencies and material weaknesses in the design
          or operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and


      b)  Any fraud, whether or not material, that involves management or
          other employees who have a significant role in the registrant's
          internal control over financial reporting.


Date: June 13, 2007                       /s/Richard P. Jacobson
                                          ------------------------------
                                          Richard P. Jacobson
                                          Chief Financial Officer

<PAGE>



                                  Exhibit 32

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


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

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

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



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

Dated: June 13, 2007

<PAGE>