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2001 ANNUAL REPORT

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                           HORIZON FINANCIAL SERVICES
                                   CORPORATION



<PAGE>


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TABLE OF CONTENTS
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         President's Letter to Shareholders.................................  1
         Selected Consolidated Financial Information........................  2
         Management's Discussion and Analysis of Financial
           Condition and Results of Operation...............................  4
         Consolidated Financial Statements.................................. 16
         Stockholder Information............................................ 42
         Corporate Information.............................................. 43















                          Annual Report on Form 10-KSB

A copy of Horizon Financial Services Corporation's Annual Report on Form 10-KSB
for the year ended June 30, 2001, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Robert W. DeCook,
President and Chief Executive Officer, Horizon Financial Services Corporation,
301 First Avenue East, Oskaloosa, Iowa, (641) 673-8328.


<PAGE>



                         [HORIZON FINANCIAL LETTERHEAD]






                                                               September 25,2001

Dear Stockholder:


I am very pleased to report to you that the Company's fiscal year ended June
30, 2001 was again one of increased profitability. Net earnings for the year
were $570,000, representing a return on average assets of .66%, compared to net
earnings of $486,000 for the prior fiscal year, an improvement of
17.3%. Net interest income, the Company's core earnings was $2.65 million for
fiscal 2001 compared to $2.72 million for the prior fiscal year, a 2.6% decline
during a time of margin compression. Net interest income after provision for
losses on loans in fiscal 2001 was $2.4 million compared to $2.6 million in
fiscal 2000. The Company's average interest rate spread, the difference between
the yield earned on interest earning assets and the rates paid on interest
bearing liabilities, was 2.73%,compared to 3.06% for 2000. Its net interest
margin, net interest income divided by average interest-earning assets, was
3.15% and 3.40% for the fiscal years 2001 and 2000 respectfully. Fee income was
$595,000, an increase of $125,000 or 26.6% from fiscal 2000. This was the
result of an increased number of fee based accounts and enhanced fee collection
efforts.

Total assets increased by $6.2 million, to $89.4 million, an increase of 7.5%.
Loans receivable increased by $3.03 million, to $65.4 million, as residential
real estate and commercial real estate loans increased.

The Company repurchased 12.9% of its common stock, or 111,500 shares, during
fiscal 2001. To date, the Company has repurchased 266,504 shares under past.
repurchase programs. The shares repurchased during fiscal 2001 were purchased
at an average price of $7.32, or 65.1% of book value at June 30, 2001.
Management believes this to be an excellent investment and a prudent use of the
Company's excess capital.

Your Board and management are committed to continue building value in Horizon
Financial. We will also continue to be an organization which builds family
financial relationships and demonstrates commitment to Jour customers and to
the communities we serve.

On behalf of all of us at Horizon Financial and Horizon Federal, we thank you
for your support of and your investment in Horizon Financial.


Yours very truly,


/s/ Robert W. DeCook
--------------------
Robert W. DeCook
President and Chief Executive Officer




<PAGE>



                   SELECTED CONSOLIDATED FINANCIAL INFORMATION


<TABLE>
<CAPTION>
                                                                      At June 30,
                                              -------------------------------------------------------------

                                                    2001       2000        1999        1998        1997
                                              -------------------------------------------------------------
                                                                    (In Thousands)
<S>                                                <C>        <C>         <C>         <C>         <C>
Selected Financial Condition Data:
---------------------------------

Total assets..................................     $89,416    $83,184     $85,023     $89,947     $85,969
Cash and cash equivalents.....................       5,592      1,981       7,917       6,367       5,621
Securities available-for-sale.................      15,525     15,670      17,097      23,922      24,942
Loans receivable, net.........................      65,446     62,417      56,066      55,996      52,193
Deposits......................................      69,872     64,761      59,576      60,145      57,641
Advances from FHLB............................       9,593      9,014      16,606      20,038      19,102
Stockholders' equity..........................       8,446      8,266       8,060       8,488       8,412
</TABLE>

<TABLE>
<CAPTION>

                                                                  Year Ended June 30,
                                               ------------------------------------------------------------

                                                    2001        2000        1999      1998(1)     1997(1)
                                               ------------------------------------------------------------
                                                         (In Thousands, Except Per Share Data)
<S>                                                 <C>        <C>         <C>         <C>         <C>
Selected Operations Data:
------------------------

Total interest income..........................     $6,575      $6,171      $6,192     $6,744      $5,895
Total interest expense.........................      3,924       3,448       3,642      4,021       3,402
                                                    ------      ------      ------     ------      ------
  Net interest income..........................      2,651       2,723       2,550      2,723       2,493
Provision for losses on loans..................        276          96         139         94         252
                                                    ------      ------      ------     ------      ------
Net interest income after
 provision for losses on loans.................      2,375       2,627       2,411      2,629       2,241
Noninterest income
  Fees, commissions and service charges........        595         470         497        448         338
  Gain (loss) on sale of securities, net.......          2       (234)     (2,038)      (167)          81
  Other noninterest income.....................        ---         ---           8         27          19
                                                    ------      ------      ------     ------      ------
Total noninterest income.......................        597         236     (1,533)        308         438
Total noninterest expense......................      2,151       2,138       2,116      2,031       2,255(2)
                                                    ------      ------      ------     ------      ------
Earnings (loss) before taxes on income.........        821         725     (1,238)        906         424
Taxes on income................................        251         239       (466)        317         146
                                                    ------      ------      ------     ------      ------
Net earnings (loss)............................     $  570      $  486      $(772)     $  589      $  278
                                                    ======      ======      ======     ======      ======

Basic earnings (loss) per common share.........      $0.72       $0.56     ($0.90)     $ 0.71      $ 0.34
Diluted earnings (loss) per common share.......      $0.71       $0.56     ($0.90)     $ 0.69      $ 0.33
Dividends per share............................      $0.18       $0.18      $0.18      $ 0.18      $ 0.16
</TABLE>


---------------
 (1)     All per share information has been restated for the 2-for-1 stock split
         paid by the Company on November 10, 1997 in the form of a 100% stock
         dividend.

 (2)     Includes the special assessment of $331,000 paid by the Company to the
         Federal Deposit Insurance Fund (the"FDIC") to recapitalize the Savings
         Association Insurance Fund (the "SAIF").


                                        2

<PAGE>


<TABLE>
<CAPTION>

                                                                     Year Ended June 30,
                                                  -----------------------------------------------------------------

                                                       2001       2000        1999         1998          1997
                                                  -----------------------------------------------------------------
<S>                                                 <C>          <C>          <C>         <C>          <C>
Selected Financial Ratios and Other Data:

Performance Ratios:
  Return on assets (ratio of net earnings
  (loss) to average  total assets).............        .66%         .58%        (.88%)       .67%         .35(1)
  Interest rate spread information:
  Average during year..........................       2.73         3.06         3.00        2.96         3.12
  End of year..................................       3.03         2.86         3.03        3.05         3.07
  Net interest margin(2).......................       3.15         3.40         3.17        3.23         3.41
  Ratio of operating expense to average
  total assets.................................       2.49         2.54         2.42        2.31         2.83(1)
  Return on stockholders' equity (ratio of
  net earnings (loss) to average equity).......       6.82         5.95        (9.33)       6.97         3.31(1)
Efficiency ratio(3)............................      66.27        66.96        69.26       63.51        67.51

Asset Quality Ratios:
  Non-performing assets to total assets at
  end of year(4)...............................       1.61         1.39         1.36        1.02         1.22
  Allowance for losses on loans to
  non-performing loans(4)......................      26.47        34.49        29.57       37.74        50.51
  Allowance for losses on loans  to total
  loans........................................        .56          .61          .61         .61          .65

Other Ratios:
  Stockholders' equity to total assets at
  end of year..................................       9.45         9.95         9.48        9.44         9.78
  Average stockholders' equity to average
  assets.......................................       9.68         9.71         9.46        9.61        10.54
  Average interest-earning assets to
  average interest-bearing liabilities.........     108.98%      107.83%      103.79%     105.65%      106.13%

Number of full-service offices.................        3            3            3           3            3
</TABLE>


---------------
(1)      Includes one-time SAIF assessment paid in fiscal 1997 of $331,000
         ($207,000, net of taxes). Excluding the SAIF assessment, return on
         assets, ratio of operating expenses to total assets and return on
         stockholders' equity was .61%, 2.41% and 5.77%, respectively, for
         fiscal 1997.

(2)      Net interest income divided by average interest-earning assets.

(3)      Noninterest expense (excluding one-time SAIF assessment paid in fiscal
         1997) divided by net interest income and noninterest income (excluding
         gain (loss) on sale of securities, net).

(4)      Nonperforming assets consist of nonaccruing loans, accruing loans
         past-due 90 or more days and real estate owned. Nonperforming loans are
         nonperforming assets less real estate owned.


                                        3

<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

         Horizon Financial Services Corporation (the "Company") is a savings and
loan holding company whose primary asset is Horizon Federal Savings Bank (the
"Bank"). The Company was incorporated in March 1994 and sold 506,017 shares of
common stock on June 28, 1994 for the purpose of acquiring all of the capital
stock of the Bank in connection with the Bank's conversion from mutual to stock
form of ownership (the "Conversion"). All references to the Company prior to
June 28, 1994, except where otherwise indicated, are to the Bank and its
subsidiary on a consolidated basis.

         The principal business of the Company has historically consisted of
attracting deposits from the general public and making loans secured by
residential and, to a lesser extent, other properties. The Company's results of
operations are primarily dependent on net interest rate spread, which is the
difference between the average yield on loans, mortgage-backed securities and
investments and the average rate paid on deposits and other borrowings. The
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. In addition, the
Company, like other non-diversified savings institution holding companies, is
subject to interest rate risk to the degree that its interest-earning assets
mature or reprice at different times, or on a different basis, than its
interest-bearing liabilities.

         The Company's results of operations are also affected by, among other
things, fee income received, gain or loss on securities available-for-sale, the
establishment of provisions for losses on loans, income derived from subsidiary
activities, the level of operating expenses and income taxes. The Company's
operating expenses principally consist of employee compensation and benefits,
occupancy expenses, federal deposit insurance premiums, data processing expenses
and other general and administrative expenses.

         The Company is significantly affected by prevailing economic conditions
including federal monetary and fiscal policies and federal regulation of
financial institutions. Deposit balances are influenced by a number of factors
including interest rates paid on competing personal investments and the level of
personal income and savings within the institution's market area. Lending
activities are influenced by the demand for housing as well as competition from
other lending institutions. The primary sources of funds for lending activities
include deposits, loan repayments, borrowings and funds provided from
operations.

         Local economic conditions in the Bank's market are declining.
Currently, farm prices for both livestock and grain are better than at this time
last year, but this is more than offset by factory layoffs and some decline in
retail business. In addition, the Bank is experiencing difficulty, as are most
business in the area, in hiring and retaining experienced personnel as labor
shortages in the area continue to exist. In the event current economic and
market conditions persist or worsen, loan demand and existing loans may be
affected, which could adversely affect the financial condition and results of
operations of the Company and the Bank.

Forward-Looking Statement

         When used in this Annual  Report or future  filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive officer,  the words or phrases "will likely
result," "are  expected  to," "will  continue,"  "is  anticipated,"  "estimate,"
"project,"   "believe"   or  similar   expressions   are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national  economic  conditions,  changes in levels of market interest

                                        4

<PAGE>


rates, credit risks of lending activities, and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.

         The Company does not undertake, and specifically disclaims any
obligations, to revise any forward- looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements.

Financial Condition

         June 30, 2001 Compared to June 30, 2000. Total assets increased $6.2
million, or 7.5%, to $89.4 million at June 30, 2001 from $83.1 million at June
30, 2000. The increase was reflected primarily in a $3.6 million increase in
cash and cash equivalents and a $3.0 million increase in loans receivable, net.
This increase was partially offset by a $295,000 decrease in deferred tax asset
and a $222,400 decrease in Federal Home Loan Bank stock.

         Total liabilities increased $6.0 million, or 8.1%, to $81.0 million at
June 30, 2001 from $74.9 million at June 30, 2000, primarily as a result of a
$5.1 million increase in deposits generally obtained through competitive rate
pricing of certificate of deposit accounts. Federal Home Loan Bank advances
increased $578,000 and accrued expenses and other liabilities increased $390,000
as a result of increased accrued interest on deposits.

         Stockholders' equity increased $180,000, or 2.2%, during fiscal 2001,
primarily through a substantial reduction in unrealized losses on securities
available for sale of $558,000 and the retention of net income as retained
earnings increased $430,000, or 8.4%. The Company repurchased 111,500 shares, or
12.9%, of its common stock, at an average per share price of $7.32, or 65.1% of
book value at June 30, 2001. The Company paid cash dividends totaling
approximately $139,000 or $.18 per share during fiscal 2001.

Results of Operations

Comparison of Fiscal Years Ended June 30, 2001 and June 30, 2000

         General. Net earnings for the year ended June 30, 2001 increased
$84,000 to $570,000 from $486,000 for the year ended June 30, 2000. This
increase was primarily attributable to increased non-interest income. Fees,
service charges, and commissions increased $125,000 as a result of increased
number of fee-based accounts and enhanced fee collection efforts, and income
from the sale of securities rose $236,000.

         During fiscal 2001, the Company's return on average assets ("ROAA") and
return on average stockholders' equity ("ROAE") was .66% and 6.82%,
respectively, compared to .58% and 5.95% for fiscal 2000. Average stockholders'
equity to average assets was 9.68% during fiscal year 2001 compared to 9.71%
during fiscal year 2000. The Company's dividend payout ratio was 25% during
fiscal 2001 compared to 32% during fiscal 2000.

         Interest Income . Interest income was $6.6 million for the year ended
June 30, 2001 and $6.2 million for the year ended June 30, 2000. Interest income
on loans increased $628,000 for fiscal 2001 reflecting the increase in the
average outstanding balance of loans receivable from $58.4 million for the year
ended June 30, 2000 compared to $65.0 million for the year ended June 30, 2001,
and an increase in average yield on loans for fiscal 2001 to 8.43% from 8.31%
for fiscal 2000. Offsetting this increase in part was a $118,000 decrease in
interest income on securities available-for-sale resulting from a decline in
balances of securities available-for-sale and a decreasing yield on the
available-for-sale portfolio during the last four months of fiscal year 2001. In
addition, there was a $106,000 decrease in other investment income for the year
ended June 30, 2001 as compared to the year ended June 30, 2000. The yield on
all average interest-earning assets increased to 7.81% during fiscal 2001 from
7.70% during fiscal 2000.

         Interest Expense. Interest expense increased $476,000 to $3.9 million
for the year ended June 30, 2001 compared to $3.4 million for the year ended
June 30, 2000. The increase in interest expense was primarily due to the average
outstanding balance of deposits increasing $6.8 million from $60.8 million for
fiscal 2000 to $67.6 million for fiscal 2001. Contributing to the increase in
interest expense was a weighted average rate on deposits increase of 54 basis
points to 5.00% for fiscal 2001 from 4.46% for fiscal 2000. The impact of the
increase in interest on deposits was offset in part by a decrease in interest on
advances and other borrowings. Interest on advances and other borrowings
decreased $191,000, or 26%, to $547,000 for the year ended June 30, 2001
compared to $738,000 for the year ended June 30, 2000. The average rate paid on
all interest-bearing liabilities increased 44 basis points to 5.08% during
fiscal 2001 from 4.64% during fiscal 2000.

                                       5

<PAGE>

         Net Interest Income. Net interest income decreased $72,000 to $2.65
million in fiscal 2001 from $2.72 in fiscal 2000, primarily the result of
increased interest paid on deposits being greater than the growth in interest on
loans accompanied with the decrease in interest on securities
available-for-sale. The Company's net interest margin, which is net interest
income divided by average interest-earning assets, decreased 25 basis points to
3.15% for fiscal 2001 as compared to 3.40% for fiscal 2000. During this same
period, the Company's interest rate spread decreased to 2.73% in fiscal 2001
from 3.06% in fiscal 2000. Also in response to decreased earnings on
available-for-sale securities and other investment income which were more
reactive to the markets declining interest rates. The ratio of the Company's
average interest-earning assets to average interest-bearing liabilities
increased to 108.98% during fiscal 2001 from 107.83% during fiscal 2000.

         Provision for Losses on Loans. The provision for losses on loans is a
result of management's periodic analysis of the adequacy of the Company's
allowance for losses on loans. During the year ended June 30, 2001, the Company
recorded a provision for losses on loans of $276,000 compared to a $96,000
provision in fiscal 2000. Additional provisions were applied in the second
quarter of fiscal 2001 in response to a $161,000 charge-off of an unsecured
commercial line of credit. The Company continues to monitor and adjust its
allowance for losses on loans as management's analysis of its loan portfolio and
economic conditions dictate. The Company believes it has taken an appropriate
approach to maintain the allowance for loan losses at a level consistent with
the Company's loss experiences and considering, among other factors, the
composition of the Company's loan portfolio, the level of the Company's
classified and non- performing assets and their estimated value. Future
additions to the Company's allowance for losses on loans and any change in the
related ratio of the allowance for losses on loans to non-performing loans are
dependent upon the economy, changes in real estate values and interest rates. In
addition, federal regulators may require additional reserves as a result of
their examination of the Company. The allowance for losses on loans reflects
what the Company currently believes is an adequate level of reserves, although
there can be no assurance that future losses will not exceed the estimated
amounts, thereby adversely affecting future results of operations. As of June
30, 2001 and June 30, 2000, the Company's allowance for losses on loans was
$369,000 and $379,000, respectively.

         As of June 30, 2001, the Company's non-performing assets, consisting of
nonaccruing loans, accruing loans 90 days or more delinquent, real estate owned
and repossessed consumer property, totaled $1,444,000 or 1.61% of total assets
compared to $1,155,000 or 1.39% of total assets as of June 30, 2000. The
increase in non-performing assets related primarily to a $295,000 increase in
non-accruing loans past-due 90 or more days and a $6,000 decrease in repossessed
consumer property. One-to-four family non-accruing mortgage loans increased
$344,000 while all other classes of non-accruing loans decreased $49,000.

         Non-interest Income. Non-interest income increased $361,000 to $597,000
for the year ended June 30, 2001 from $236,000 for the year ended June 30, 2000.
The  increase  was  primarily  attributable  to a gain on  sales  of  securities
available-for-sale  of $2,000 for fiscal  2001 as compared to losses of $234,000
on sales of securities  available-for-sale  in fiscal 2000.  Contributing to the
increase in non-interest  income was a 27%

                                        6

<PAGE>

increase in fees, service charges and commissions of $125,000, from $470,000 for
the year ended June 30, 2000, to $595,000 for the year ended June 30, 2001, as a
result of an increased number of fee based accounts and enhanced fee collection
efforts.

         Non-interest Expense. Non-interest expense increased by $13,000 in
fiscal 2001. Increases of $48,000 in other expense and $11,000 in data
processing services were largely offset by decreases in compensation, payroll
taxes and employee benefits of $22,000 and advertising expense of $22,000.

         Income Tax Expense. Income taxes increased $12,000 to $251,000 for the
year ended June 30, 2001 from $239,000 for the same period in 2000. The increase
was primarily due to an increase in earnings before taxes on income. Income tax
expense was reduced by low income housing credits of approximately $42,000,
which will continue annually through 2005. The Company's effective tax rate for
fiscal 2001 was 30.6%, a decrease from 33.0% for fiscal 2000 due to the
reduction of necessary over accrual of income tax which is slowly being brought
into income.

Comparison of Fiscal Years Ended June 30, 2000 and June 30, 1999

         General. Net earnings for the year ended June 30, 2000 increased
$1,257,000 to $485,000 from a net loss of ($772,000) for the year ended June 30,
1999. This increase was primarily attributable to a significant decrease in
losses on sales of securities.

         During fiscal 2000, the Company's ROAA and ROAE was .58% and 5.95%,
respectively, compared to (.88%) and (9.33%) for fiscal 1999. Average
stockholders' equity to average assets was 9.71% during fiscal year 2000
compared to 9.46% during fiscal 1999. The Company's dividend payout ratio was
32% during fiscal 2000.

         Interest Income. Interest income was $6.2 million for the year ended
June 30, 2000 and June 30, 1999. Interest income on loans increased $255,000 and
was offset with a $267,000 decrease on interest income on securities
available-for-sale for the year ended June 30, 2000 as compared to the year
ended June 30, 1999 reflecting the increase in the average outstanding balance
of loans receivable from $55.2 million for the year ended June 30, 1999 compared
to $58.4 million for the year ended June 30, 2000 which was funded through the
decrease in the average outstanding balance of securities available-for-sale to
$16.2 million for fiscal 2000 as compared to $21.0 million for fiscal 1999. The
yield on all average interest-earning assets was 7.70% during fiscal 2000 and
1999.

         Interest Expense. Interest expense decreased $195,000 to $3.4 million
for the year ended June 30, 2000 compared to $3.6 million for the year ended
June 30, 1999. The decrease in interest expense was primarily attributable to a
decrease in the average outstanding balance of FHLB advances. The average rate
paid on advances increased by 20 basis points to 5.46% during fiscal 2000 from
5.26% during fiscal 1999. The average outstanding balance of savings deposits
increased $2.3 million from $58.4 for the year ended June 30, 1999 to $60.7
million for fiscal year ended June 30, 2000. The average rate paid on deposits
decreased by 5 basis points to 4.46% during fiscal 2000 from 4.51% during fiscal
1999. The average rate paid on all interest-bearing liabilities decreased 6
basis points to 4.64% during fiscal 2000 from 4.70% during fiscal 1999.

         Net Interest Income. Net interest income increased $173,000 to $2.7
million in fiscal 2000 from $2.5 in fiscal 1999. The ratio of the Company's
average interest-earning assets to average interest-bearing liabilities
increased to 107.83% during fiscal 2000 from 103.79% during fiscal 1999. The
Company's net interest margin, which is net interest income divided by average
interest-earning assets, increased 23 basis points to 3.40% for fiscal 2000 as
compared to 3.17% for fiscal 1999. During this same period the Company's
interest rate spread increased slightly to 3.06% in fiscal 2000 from 3.00% in
fiscal 1999.

                                       7

<PAGE>


         Provision for Losses on Loans. The provision for losses on loans is a
result of management's periodic analysis of the adequacy of the Company's
allowance for losses on loans. During the year ended June 30, 2000, the Company
recorded a provision for losses on loans of $96,000 compared to a $139,000
provision in fiscal 1999. The Company continues to monitor and adjust its
allowance for losses on loans as management's analysis of its loan portfolio and
economic conditions dictate. The Company believes it has taken an appropriate
approach to maintain the allowance for loan losses at a level consistent with
the Company's loss experiences and considering, among other factors, the
composition of the Company's loan portfolio, the level of the Company's
classified and non-performing assets and their estimated value. Future additions
to the Company's allowance for losses on loans and any change in the related
ratio of the allowance for losses on loans to non-performing loans are dependent
upon the economy, changes in real estate values and interest rates. In addition,
federal regulators may require additional reserves as a result of their
examination of the Company. The allowance for losses on loans reflects what the
Company currently believes is an adequate level of reserves, although there can
be no assurance that future losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations. As of June 30, 2000
and June 30, 1999 the Company's allowance for losses on loans was $379,000 and
$343,000, respectively.

         As of June 30, 2000, the Company's non-performing assets, consisting of
nonaccruing loans, accruing loans 90 days or more delinquent, real estate owned
and repossessed consumer property, totaled $1,155,000 or 1.39% of total assets
compared to $1,160,000 or 1.36% of total assets as of June 30, 1999. The
decrease in non-performing assets related primarily to a $61,000 decrease in
non- accruing loans past-due 90 or more days and a $56,000 increase in
repossessed consumer property.

         Non-interest Income. Noninterest income increased $1.8 million to
$236,000 for the year ended June 30, 2000 from ($1,533,000) for the year ended
June 30, 1999. The increase was primarily attributable to a decrease in losses
on assets available for sale from a loss of $2.0 million during fiscal 1999 as
compared to a loss of $234,000 for fiscal 2000. The loss recognized on
securities for fiscal 1999 of $1.5 million was the result of write-downs on
interest only mortgage-backed securities resulting from a decline in fair value
that was judged to be other than temporary. This decline in fair value resulted
from a sustained increase in the prepayment speeds, due to refinancings, of the
underlying mortgage loans as a result of the low interest rate environment. The
Bank cannot predict interest rates or prepayment speeds. This increase was
slightly offset by a $27,000 decrease in fees, service charges and commissions,
primarily due to decreased loan fees received on loans originated for sale in
the secondary market as a result of a reduction in loans originated for sale.

         Non-interest Expense. Noninterest expense increased by $22,000 in
fiscal 2000. Increases of $59,000 in other expense and $25,000 in advertising
expense were partially offset by decreases in compensation, payroll taxes and
employee benefits of $45,000 and office property and equipment expense of
$16,000.

         Income Tax Expense. Income taxes increased $706,000 to $239,000 for the
year ended June 30, 2000 from ($467,000) for the same period in 1999. The
increase was primarily due to an increase in earnings prior to taxes on income.
Income tax expense was reduced by low income housing credits of approximately
$42,000, which will continue annually through 2005. The Company's effective tax
rate for fiscal 2000 was 33.0%.


                                        8

<PAGE>


Average Balances, Interest Rates and Yields

         The following table presents for the periods indicated the total dollar
amount of interest income earned on average interest-earning assets and total
dollar amount of interest expense paid on average interest-bearing liabilities,
as well as their resultant yields and rates, respectively. No tax equivalent
adjustments were made. All average balances are monthly average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield.

<TABLE>
<CAPTION>

                                                                              Year Ended June 30,
                                     ----------------------------------------------------------------------------------------------
                                                   2001                              2000                          1999
                                     ------------------------------    -----------------------------  -----------------------------
                                      Average      Interest              Average    Interest            Average    Interest
                                     Outstanding    Earned/   Yield/   Outstanding   Earned/  Yield/  Outstanding   Earned/  Yield/
                                      Balance        Paid      Rate      Balance      Paid     Rate     Balance      Paid     Rate
                                     ----------    --------  -------   -----------   ------   ------  -----------   -------  ------
                                                                           (Dollars in Thousands)
<S>                                     <C>          <C>        <C>      <C>          <C>       <C>      <C>         <C>       <C>
Interest-Earning Assets:
 Loans receivable(1).................  $64,985      $5,479     8.43%    $58,401      $4,852    8.31%    $55,243     $4,597    8.32%
 Securities available-for-sale.......   15,228         955     6.27      16,259       1,073    6.60      21,020      1,340    6.38
 Other interest-earning assets.......    3,360         101     3.01       4,349         176    4.05       3,002        178    5.93
 FHLB stock..........................      634          39     6.15       1,087          70    6.44       1,203         77    6.40
                                       -------      ------              -------      ------             -------     ------
  Total interest-earning assets(1)...   84,207       6,574     7.81      80,096       6,171    7.70      80,468      6,192    7.70
                                       -------      ------              -------      ------             -------     ------

Interest-Bearing Liabilities:
 Savings deposits....................   23,124       1,027     4.44      23,441       1,055    4.50      19,938        857    4.30
 Money market deposits...............      352           9     2.56         433          10    2.31         540         13    2.41
 Demand and NOW deposits.............    8,650         179     2.07       8,063         163    2.02       6,905        132    1.91
 Certificates of deposit.............   35,442       2,162     6.10      28,822       1,482    5.14      31,031      1,635    5.27
 FHLB Advances.......................    9,699         547     5.64      13,522         738    5.46      19,115      1,005    5.26
                                       -------      ------              -------      ------             -------     ------
   Total interest-bearing liabilities  $77,267       3,924     5.08     $74,281       3,448    4.64     $77,529      3,642    4.70
                                       -------      ------              -------      ------             -------     ------

Net interest income..................               $2,650                           $2,723                         $2,550
                                                    ======                            =====                          =====

Net interest rate spread.............                          2.73%                           3.06%                          3.00%
                                                               ====                            ====                           ====

Net interest-earning assets..........  $ 6,940                           $5,815                          $2,939
                                       =======                            =====                           =====

Net interest margin(2)...............                          3.15%                           3.40%                          3.17%
                                                               ====                            ====                           ====

Average interest-earning assets to

 average interest-bearing liabilities               108.98%                          107.83%                        103.79%
                                                    ======                           ======                         ======
</TABLE>

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

(1) Calculated net of deferred loan fees, loan  discounts,  loans in process and
    the allowance for losses on loans.

(2) Net interest income divided by average interest-earning assets.



                                        9

<PAGE>



Rate/Volume Analysis of the Net Interest Income

         The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.

<TABLE>
<CAPTION>
                                                                    Year Ended June 30,
                                        ------------------------------------------------------------------------------
                                                        2001 vs. 2000                          2000 vs. 1999
                                        ------------------------------------------------------------------------------
                                                Increase                                  Increase
                                               (Decrease)                                (Decrease)
                                                 Due to                                     Due to
                                        ----------------------------      Total      -------------------    Total
                                                                        Increase                           Increase
                                           Volume        Rate          (Decrease)      Volume     Rate    (Decrease)
                                        ----------- ---------------- --------------- --------- --------- -------------
                                                                    (In Thousands)
<S>                                       <C>         <C>                <C>           <C>         <C>         <C>
Interest-earning assets:
  Loans receivable......................    $343         $285            $628           $250       $  5        $ 255
  Securities available-for-sale.........      (6)        (112)           (118)          (404)       137         (267)
  Other interest-earning assets.........     (54)         (21)            (75)            (1)        (1)          (2)
  FHLB Stock............................     (15)         (16)            (31)            (9)         2           (7)
                                           -----        -----           -----         ------        ---         ----

    Total interest-earning assets.......    $268         $136            $404          $(165)      $143        $ (21)
                                             ===          ===             ===           ====        ===           ==

Interest-bearing liabilities:
  Savings deposits......................       2          (30)            (28)            (5)       203          198
  Money market deposits.................      (1)         ---              (1)            (3)       ---           (3)
  Demand and NOW deposits...............      (1)          17              16             19         12           31
  Certificates of deposits..............     557          123             680            (92)       (61)        (153)
  FHLB advances.........................   1,057       (1,248)           (191)          (360)        93         (267)
                                           -----        -----             ---            ---        ---         ----

    Total interest-bearing liabilities..  $1,614      $(1,138)           $476          $(441)      $ 24        $(194)
                                           =====       ======             ===           ====         ==         ----

Net interest income.....................                                 $(72)                                 $ 173
                                                                           ==                                   ====
</TABLE>

                                                        10

<PAGE>


Interest Rate Spread

         The following table sets forth the weighted average yields on
interest-earning assets, the weighted average rates on interest-bearing
liabilities and the interest rate spread between weighted average yields and
rates at the end of each of the years presented. Non-accruing loans have been
included in the table as carrying a zero yield.

                                                            At June 30,
                                                 -------------------------------
                                                    2001        2000        1999
                                                 -------------------------------
Weighted average yield on:

 Loans receivable, net(1)......................    8.49%       8.16%       8.14%
 Securities available-for-sale.................    5.42        6.55        6.37
 Other interest-earning assets(2)..............    3.73        1.85        4.85
 FHLB stock....................................    4.56        6.86        6.25
   Combined weighted average yield on
   interest-earning assets.....................    7.64        7.72        7.52

Weighted average rate paid on:

 Savings deposits..............................    3.69        4.60        4.17
 Money market deposits.........................    2.28        2.41        2.37
 Demand and NOW deposits.......................    1.57        1.98        1.81
 Certificates of Deposit.......................    5.81        5.63        5.12
 FHLB advances.................................    5.49        5.67        5.07
   Combined weighted average rate paid
   on interest-bearing liabilities.............    4.64        4.86        4.49

 Spread........................................    3.00%       2.86%       3.03%


---------------
(1) Calculated net of deferred loan fees, loan  discounts,  loans in process and
    the allowance for losses on loans.
(2) FHLB demand account only other interest-earning assets on June 30, 2001.

Asset/Liability Management

         The Company currently focuses lending efforts toward originating
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity, generally fifteen years or less. The
Company also makes a small amount of longer term fixed rate mortgages for its
portfolio from time to time. This allows the Company to maintain a portfolio of
loans which will be sensitive to changes in the level of interest rates while
providing a reasonable spread to the cost of liabilities used to fund the loans.
The Company also makes long-term, fixed-rate mortgage loans which are sold in
the secondary market.

         The Company's primary objective for its investment portfolio is to
provide the liquidity necessary to meet loan funding needs. This portfolio is
used in the ongoing management of changes to the Company's assets/liability mix,
while contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while

                                     11

<PAGE>


maximizing yield, the need to provide collateral for borrowings, and to fulfill
the Company's asset/liability management goals.

         The Company's cost of funds are typically responsive to changes in
interest rates due to the relatively short-term nature of its deposit portfolio.
Consequently, the results of operations are influenced by the levels of
short-term interest rates. The Company offers a range of maturities on its
deposit products at competitive rates and monitors the maturities on an ongoing
basis.

         The Company emphasizes and promotes its savings, money market, demand
and NOW accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally within its primary
market area. The savings and NOW accounts tend to be less susceptible to rapid
changes in interest rates.

         In managing its asset/liability mix, the Company, at times, depending
on the relationship between long- and short-term interest rates, market
conditions and consumer preference, may place somewhat greater emphasis on
maximizing its net interest margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. In this regard, the Company has
borrowed and may continue to borrow from the FHLB to purchase securities when
advantageous interest rate spreads can be obtained. Management believes that the
increased net income which may result from an acceptable mismatch in the actual
maturity or repricing of its asset and liability portfolios can, during periods
of declining or stable interest rates, provide sufficient returns to justify the
increased exposure to sudden and unexpected increases in interest rates which
may result from such a mismatch. The Company has established limits, which may
change from time to time, on the level of acceptable interest rate risk. There
can be no assurance, however, that in the event of an adverse change in interest
rates the Company's efforts to limit interest rate risk will be successful.

         Net Portfolio Value. The OTS provides a Net Portfolio Value ("NPV")
approach to the quantification of interest rate risk. This approach calculates
the difference between the present value of expected cash flows from assets and
the present value of expected cash flows from liabilities, as well as cash flows
from off-balance sheet contracts. Management of the Bank's assets and
liabilities is done within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV
which is acceptable given certain interest rate changes.

         The OTS issued a regulation which uses a net market value methodology
to measure the interest rate risk exposure of thrift institutions. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Thrift
institutions with greater than "normal" interest rate exposure must take a
deduction from their total capital available to meet their risk based capital
requirement. The amount of that deduction is one-half of the difference between
(a) the institution's actual calculated exposure to a 200 basis point interest
rate increase or decrease (whichever results in the greater pro forma decrease
in NPV) and (b) its "normal" level of exposure which is 2% of the present value
of its assets. The regulation, however, will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Notwithstanding the foregoing and the fact that the Bank, due to its
asset size and level of risk-based capital, is exempt from this requirement,
utilizing this measuring concept, a deduction to risk-based capital would have
been required as of June 30, 2001 if the regulation applied to the Bank.
However, even if such deduction was applied, the Bank would still meet their
risk-based capital requirement under current regulatory guidelines.

         Presented below, as of June 30, 2001, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments, up and down
300 basis points and compared to Board policy limits and in accordance with OTS

                                       12

<PAGE>

regulations. Such limits have been established with consideration of the dollar
impact of various rate changes and the Bank's strong capital position.
Management reviews the OTS measurements on a quarterly basis. At June 30, 2001,
the Bank's interest rate risk was within the Board's prescribed guidelines.



                                                    At June 30,
            Change in           Board Limit            2001
          Interest Rate       (min NPV ratios)        -----
          (Basis Points)          % Change           %Change
        -------------------------------------------------------
               +300                5.00%                9.32%
               +200                6.00                10.31
               +100                6.75                11.27
                  0                6.75                12.08
               -100                6.75                12.51
               -200                6.00                12.78
               -300                5.00                13.03


         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 or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayments and early withdrawal levels would likely deviate
significantly from those assumed in calculating the tables. Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.

Liquidity and Capital Resources

         Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing investments and (iv) the
objectives of its asset/liability management program. Excess liquidity generally
is invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds beyond
its internal ability to generate such funds it has additional borrowing capacity
with the FHLB of Des Moines and collateral eligible for repurchase agreements.

         The Company principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain liquidity,
and to meet other operating needs. At June 30, 2001, the Company had $2.7
million of loan commitments. The Company anticipates that it will have
sufficient funds available to meet outstanding loan commitments. Management
believes that loan repayments and other sources of funds will be adequate to
meet and exceed the Bank's foreseeable short- and long-term liquidity needs.

         Certificates of deposit scheduled to mature in a year or less at June
30, 2001 totaled $28.4 million or 76.3% of the Company's total certificates of
deposit. Based on historical experience, management believes that a significant
portion of such deposits will remain with the Company. There can be no
assurance, however, that the Company can retain all such deposits. At June 30,
2001, the Company had outstanding borrowings of $9.6 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $26.4 million.

                                       13

<PAGE>


         The primary investing activities of the Company include the origination
of loans and the purchase of mortgage-backed securities. At June 30, 2001, these
assets accounted for over 86.7% of the Company's total assets. Such origination
and purchases are funded primarily from loan repayments, repayments of
mortgage-backed and investment securities, deposit growth, FHLB advances, and
net income.

         At June 30, 2001, the Bank had tangible and core capital of $6.2
million, or 7.1% of adjusted total assets, which was approximately $4.9 million
and $2.7 million above the minimum requirements of 1.5% and 4.0%, respectively.
At June 30, 2001, the Bank had total risk-based capital of $6.5 million
(including $6.2 million in core capital), or 12.0% of risk-weighted assets of
$54.5 million. This amount was $2.2 million above the 8.0% requirement in effect
on that date.

Impact of Inflation and Changing Prices

         The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and results of
operations generally in terms of historical dollars without considering changes
in the relative purchasing power of money over time because of inflation. The
impact of inflation is reflected in the increased cost of the Company's
operations. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.

Effect of New Accounting Standards

         Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" - SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 does not
allow hedging of a security which is classified as held to maturity.
Accordingly, upon adoption of SFAS No. 133, companies may reclassify any
security from held to maturity to available for sale if they wish to be able to
hedge the security in the future. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, was effective for the Company beginning July 1, 2000. The adoption
of SFAS No. 133, SFAS No. 137 and SFAS No. 138 did not have a significant impact
on the Company's financial statements.

         In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.

                                       14

<PAGE>

 [KPMG LETTERHEAD]

                          Independent Auditors' Report



The Board of Directors
Horizon Financial Services Corporation
Oskaloosa, Iowa:


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Horizon
Financial Services Corporation and subsidiaries as of June 30, 2001 and 2000 and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity  and  comprehensive  income  and cash  flows for each of the years in the
three-year period ended June 30, 2001. These consolidated  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Horizon Financial
Services  Corporation  and  subsidiaries  as of June  30,  2001 and 2000 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended June 30, 2001, in conformity with accounting  principles
generally accepted in the United States of America.



/s/ KPMG LLP
------------
KPMG LLP



Des Moines, Iowa
August 1, 2001


                                       15


<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                           Consolidated Balance Sheets

                             June 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                         2001               2000
                                                                                     ------------       ------------
<S>                                                                                  <C>                  <C>
                                     Assets
Cash and cash equivalents                                                            $  5,591,526          1,981,511
Securities available-for-sale (note 2)                                                 15,525,117         15,670,119
Loans receivable, net (notes 3 and 4)                                                  65,445,714         62,417,395
Real estate (note 5)                                                                      280,458            248,951
Stock in Federal Home Loan Bank, at cost                                                  480,100            702,500
Office property and equipment, net (note 6)                                             1,253,741          1,049,821
Accrued interest receivable (note 7)                                                      682,183            602,765
Deferred tax asset (note 10)                                                               85,550            380,300
Prepaid expenses and other assets                                                          71,499            130,718
                                                                                     ------------       ------------

                    Total assets                                                     $ 89,415,888         83,184,080
                                                                                     ============       ============

                      Liabilities and Stockholders' Equity

Deposits (note 8)                                                                    $ 69,871,926         64,761,224
Advances from Federal Home Loan Bank (note 9)                                           9,592,627          9,014,199
Advance payments by borrowers for taxes and insurance                                     393,550            410,555
Accrued income taxes                                                                      191,603            201,950
Accrued expenses and other liabilities                                                    919,996            530,145
                                                                                     ------------       ------------

                    Total liabilities                                                  80,969,702         74,918,073
                                                                                     ------------       ------------

Stockholders' equity:
     Preferred stock, $.01 par value; authorized 250,000 shares; none issued                   --                --
     Common stock, $.01 par value; 1,500,000 shares authorized;
         1,500,000 shares authorized                                                       10,462             10,462
     Additional paid-in capital                                                         5,022,511          5,020,361
     Retained earnings, substantially restricted (note 12)                              5,565,793          5,135,636
     Treasury stock, at cost (294,736 and 183,236 shares in 2001
         and 2000, respectively)                                                       (2,129,894)        (1,314,197)
     Unearned employee stock ownership plan shares (note 11)                                   --             (5,593)
     Accumulated other comprehensive loss - net
         unrealized  loss on securities available for sale                                (22,686)          (580,662)
                                                                                     ------------       ------------

                    Total stockholders' equity                                          8,446,186          8,266,007

Commitments and contingencies (notes 3 and 15)                                                 --                 --
                                                                                     ------------       ------------

                    Total liabilities and stockholders' equity                       $ 89,415,888         83,184,080
                                                                                     ============       ============
</TABLE>



See accompanying notes to consolidated financial statements.



                                       16

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Operations

                    Years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>


                                                                                     2001            2000             1999
                                                                                  ----------      ----------       ----------
<S>                                                                               <C>              <C>              <C>
Interest income:
     Loans                                                                        $5,479,239       4,851,413        4,597,470
     Investment securities available-for-sale                                        955,098       1,072,849        1,339,629
     Other interest income                                                           140,300         246,441          255,272
                                                                                  ----------      ----------       ----------

                     Total interest income                                         6,574,637       6,170,703        6,192,371
                                                                                  ----------      ----------       ----------

Interest expense:
     Deposits (note 8)                                                             3,376,353       2,709,550        2,636,943
     Advance from Federal Home Loan Bank (note 9)                                    547,170         738,089        1,005,569
                                                                                  ----------      ----------       ----------

                     Total interest expense                                        3,923,523       3,447,639        3,642,512
                                                                                  ----------      ----------       ----------

                     Net interest income                                           2,651,114       2,723,064        2,549,859

Provision for losses on loans (note 4)                                               276,373          96,000          138,540
                                                                                  ----------      ----------       ----------

                     Net interest income after provision for losses on loans       2,374,741       2,627,064        2,411,319
                                                                                  ----------      ----------       ----------

Noninterest income:
     Fees, service charges and commissions                                           595,219         470,009          497,012
     Gain (loss) on sale of securities, net                                            2,084        (233,976)      (2,038,667)
     Other                                                                                --              --            8,573
                                                                                  ----------      ----------       ----------

                     Total noninterest income (loss)                                 597,303         236,033       (1,533,082)
                                                                                  ----------      ----------       ----------

Noninterest expense:
     Compensation, payroll taxes and employee benefits (note 11)                   1,143,216       1,165,315        1,210,041
     Advertising                                                                      75,286          97,440           71,750
     Office property and equipment                                                   324,602         317,303          333,336
     Federal insurance premiums and special assessments (note 13)                     32,719          41,431           44,197
     Data processing services                                                        180,961         169,557          155,169
     Other real estate                                                                19,658          21,232           35,317
     Other                                                                           374,399         326,187          266,798
                                                                                  ----------      ----------       ----------

                     Total noninterest expense                                     2,150,841       2,138,465        2,116,608
                                                                                  ----------      ----------       ----------

                     Earnings (loss) before taxes on income (benefit)                821,203         724,632       (1,238,371)

Taxes on earnings (benefit) (note 10)                                                251,600         239,100         (466,600)
                                                                                  ----------      ----------       ----------

                     Net earnings (loss)                                          $  569,603         485,532         (771,771)
                                                                                  ==========      ==========       ==========

Basic earnings (loss) per common share                                            $     0.72            0.56            (0.90)
                                                                                  ==========      ==========       ==========

Diluted earnings (loss) per common share                                          $     0.71            0.56            (0.90)
                                                                                  ==========      ==========       ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       17

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

  Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
                                     Income

                    Years ended June 30, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                       Preferred    Common      paid-in      Retained      Treasury
                                                                         stock       stock      capital      earnings       stock
                                                                      -----------   -------   ----------   ----------    ----------
<S>                                                                   <C>            <C>       <C>          <C>          <C>
Balance at June 30, 1998                                              $        --    10,462    4,894,744    5,730,257    (1,185,924)

Comprehensive income:
     Net earnings (loss)                                                       --        --           --     (771,771)           --
     Unrealized losses on securities available-for-sale                        --        --           --           --            --
     Less: reclassification adjustment for net realized losses
         included in net income, net of tax                                    --        --           --           --            --
                                                                      -----------   -------   ----------   ----------    ----------

         Total comprehensive income (loss)                                     --        --           --     (771,771)           --
                                                                      -----------   -------   ----------   ----------    ----------


Dividends declared ($.18 per share)                                            --        --           --     (153,963)           --
Treasury stock acquired                                                        --        --           --           --       (44,375)
Stock options exercised                                                        --        --           --          (68)          728
ESOP shares allocated                                                          --        --           --           --            --
Stock appreciation of allocated ESOP shares                                    --        --       89,450           --            --
Tax benefit related to non-qualified recognition and retention plan            --        --       12,567           --            --
Amortization of recognition and retention plan                                 --        --           --           --            --
                                                                      -----------   -------   ----------   ----------    ----------

Balance at June 30, 1999                                                       --    10,462    4,996,761    4,804,455    (1,229,571)

Comprehensive income:
     Net earnings                                                              --        --           --      485,532            --
     Unrealized losses on securities available-for-sale                        --        --           --           --            --
     Less: reclassification adjustment for net realized losses
         included in net income, net of tax                                    --        --           --           --            --
                                                                      -----------   -------   ----------   ----------    ----------

         Total comprehensive income                                            --        --           --      485,532            --
                                                                      -----------   -------   ----------   ----------    ----------

Dividends declared ($.18 per share)                                            --        --           --     (154,351)           --
Treasury stock acquired                                                        --        --           --           --       (84,626)
ESOP shares allocated                                                          --        --           --           --            --
Stock appreciation of allocated ESOP shares                                    --        --       23,600           --            --
                                                                      -----------   -------   ----------   ----------    ----------

Balance at June 30, 2000                                                       --    10,462    5,020,361    5,135,636    (1,314,197)

Comprehensive income:
     Net earnings                                                              --        --           --      569,603            --
     Unrealized gains on securities available-for-sale                         --        --           --           --            --
     Less: reclassification adjustment for net realized gains
         included in net income, net of tax                                    --        --           --           --            --
                                                                      -----------   -------   ----------   ----------    ----------

         Total comprehensive income                                            --        --           --      569,603            --
                                                                      -----------   -------   ----------   ----------    ----------

Dividends declared ($.18 per share)                                            --        --           --     (139,446)           --
Treasury stock acquired                                                        --        --           --           --      (815,697)
ESOP shares allocated                                                          --        --           --           --            --
Stock appreciation of allocated ESOP shares                                    --        --        2,150           --            --
                                                                      -----------   -------   ----------   ----------    ----------

Balance at June 30, 2001                                              $        --    10,462    5,022,511    5,565,793    (2,129,894)
                                                                      ===========   =======   ==========   ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                     Recognition     Net unrealized
                                                                         Unearned        and            loss on
                                                                           ESOP       retention        securities       Additional
                                                                          shares         plan      available-for-sale      Total
                                                                       ----------    ----------   ------------------    ---------
<S>                                                                      <C>            <C>            <C>              <C>
Balance at June 30, 1998                                                 (129,205)      (11,439)       (821,075)        8,487,820

Comprehensive income:
     Net earnings (loss)                                                       --            --              --          (771,771)
     Unrealized losses on securities available-for-sale                        --            --      (1,061,478)       (1,061,478)
     Less: reclassification adjustment for net realized losses
         included in net income, net of tax                                    --            --       1,426,296         1,426,296
                                                                       ----------    ----------      ----------        ----------

         Total comprehensive income (loss)                                     --            --         364,818          (406,953)
                                                                       ----------    ----------      ----------        ----------


Dividends declared ($.18 per share)                                            --            --              --          (153,963)
Treasury stock acquired                                                        --            --              --           (44,375)
Stock options exercised                                                        --            --              --               660
ESOP shares allocated                                                      63,702            --              --            63,702
Stock appreciation of allocated ESOP shares                                    --            --              --            89,450
Tax benefit related to non-qualified recognition and retention plan            --            --              --            12,567
Amortization of recognition and retention plan                                 --        11,439              --            11,439
                                                                       ----------    ----------      ----------        ----------

Balance at June 30, 1999                                                  (65,503)           --        (456,257)        8,060,347

Comprehensive income:
     Net earnings                                                              --            --              --           485,532
     Unrealized losses on securities available-for-sale                        --            --        (331,269)         (331,269)
     Less: reclassification adjustment for net realized losses
         included in net income, net of tax                                    --            --         206,864           206,864
                                                                       ----------    ----------      ----------        ----------

         Total comprehensive income                                            --            --        (124,405)          361,127
                                                                       ----------    ----------      ----------        ----------

Dividends declared ($.18 per share)                                            --            --              --          (154,351)
Treasury stock acquired                                                        --            --              --           (84,626)
ESOP shares allocated                                                      59,910            --              --            59,910
Stock appreciation of allocated ESOP shares                                    --            --              --            23,600
                                                                       ----------    ----------      ----------        ----------

Balance at June 30, 2000                                                   (5,593)           --        (580,662)        8,266,007

Comprehensive income:
     Net earnings                                                              --            --              --           569,603
     Unrealized gains on securities available-for-sale                         --            --         559,283           559,283
     Less: reclassification adjustment for net realized gains
         included in net income, net of tax                                    --            --          (1,307)           (1,307)
                                                                       ----------    ----------      ----------        ----------

         Total comprehensive income                                            --            --         557,976         1,127,579
                                                                       ----------    ----------      ----------        ----------

Dividends declared ($.18 per share)                                            --            --              --          (139,446)
Treasury stock acquired                                                        --            --              --          (815,697)
ESOP shares allocated                                                       5,593            --              --             5,593
Stock appreciation of allocated ESOP shares                                    --            --              --             2,150
                                                                       ----------    ----------      ----------        ----------

Balance at June 30, 2001                                                       --            --         (22,686)        8,446,186
                                                                       ==========    ==========      ==========        ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       18

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                    Years ended June 30, 2001, 2000 and 1999



<TABLE>
<CAPTION>
                                                                                  2001              2000              1999
                                                                              -----------       -----------       -----------
<S>                                                                           <C>                   <C>              <C>
Cash flows from operating activities:
     Net earnings (loss)                                                      $   569,603           485,532          (771,771)
     Adjustments to reconcile net income (loss) to net cash provided by
      operating activities:
         Depreciation                                                             134,051           140,247           147,461
         Amortization of fees, premiums, and accretion of discounts, net           13,523           (36,793)           (7,636)
         Provision for losses on loans                                            276,373            96,000           138,540
         Loans originated for sale                                             (5,468,450)       (2,558,620)       (9,047,665)
         Proceeds on sales of loans                                             4,861,203         3,527,863         8,616,722
         Amortization of stock compensation plans                                   7,743            83,510           177,158
         (Gain) loss on sale of securities                                         (2,084)          233,976           547,667
         Impairment losses on securities                                               --                --         1,491,000
         Gain on sale of fixed assets                                              (3,687)               --            (8,573)
         Reinvested dividends                                                     (31,901)          (65,668)          (75,149)
         (Increase) decrease in accrued interest receivable                       (79,418)          (80,644)          160,999
         Increase (decrease) in accrued taxes payable and deferred taxes          (47,346)          669,877          (877,419)
         Other, net                                                               462,563           122,283          (209,838)
                                                                              -----------       -----------       -----------

                    Net cash provided by operating activities                     692,173         2,617,563           281,496
                                                                              -----------       -----------       -----------

Cash flows from investing activities:
     Securities available-for-sale:
         Purchases                                                             (5,072,406)       (4,215,094)       (6,338,703)
         Proceeds from sale                                                     4,651,188         1,232,520         6,739,179
         Proceeds from maturity and principal collected                         1,476,407         4,081,993         5,047,962
     Loans to customers, net                                                   (2,742,445)       (7,416,239)          222,422
     Proceeds from sale of real estate                                                 --                --             5,000
     Purchases of real estate                                                          --                --          (100,000)
     Proceeds from sale of Federal Home Loan Bank stock                           222,400           500,000                --
     Proceeds from sale of office property and equipment                           11,900                --            13,582
     Purchases of office property and equipment                                  (346,184)         (101,015)         (115,007)
                                                                              -----------       -----------       -----------

                    Net cash (used in) provided by investing activities        (1,799,140)       (5,917,835)        5,474,435
                                                                              -----------       -----------       -----------

Cash flows from financing activities:
     Increase (decrease) in deposits                                            5,110,702         5,184,992          (568,634)
     (Decrease) increase in advance payments by borrowers for taxes and
      insurance                                                                   (17,005)           10,725            (7,220)
     Proceeds from advances from Federal Home Loan Bank                         3,500,000         1,000,000         6,650,000
     Principal payments on advances from Federal Home Loan Bank                (2,921,572)       (8,591,977)      (10,081,998)
     Payment of dividends                                                        (139,446)         (154,351)         (153,963)
     Exercise of stock options                                                         --                --               660
     Treasury stock acquired                                                     (815,697)          (84,626)          (44,375)
                                                                              -----------       -----------       -----------

                    Net cash provided by (used in) financing activities         4,716,982        (2,635,237)       (4,205,530)
                                                                              -----------       -----------       -----------

                    Net increase (decrease) in cash and cash equivalents        3,610,015        (5,935,509)        1,550,401

Cash and cash equivalents at beginning of year                                  1,981,511         7,917,020         6,366,619
                                                                              -----------       -----------       -----------

Cash and cash equivalents at end of year                                      $ 5,591,526         1,981,511         7,917,020
                                                                              ===========       ===========       ===========

Supplemental disclosures of cash flow information: Cash paid
    during the year
     for:
         Interest                                                             $ 3,623,104         3,344,069         3,752,446
         Taxes                                                                    298,947           185,082           415,750
     Noncash investing and financing activities:
         Transfers from loans to real estate                                       45,000                --                --
                                                                              ===========       ===========       ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       19

<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000



(1)   Summary of Significant Accounting Policies

      Description of the Business and Concentration of Credit

      Horizon Financial Services Corporation and subsidiaries (the Company or
      the Parent Company) is a thrift holding company headquartered in
      Oskaloosa, Iowa. The Company was organized for the purpose of owning the
      outstanding stock of Horizon Federal Savings Bank, FSB, (the Bank).

      The Bank serves Mahaska County, Marion County, and to a lesser extent
      Wapello County through its three retail offices, two of which are located
      in Oskaloosa, Iowa, and one located in Knoxville, Iowa. The Bank is
      primarily engaged in attracting retail deposits from the general public
      and investing those funds in residential and commercial real estate loans
      and other consumer and commercial loans in its central Iowa market area.
      Although the Bank has a diversified loan portfolio, a substantial portion
      of its borrowers ability to repay their loans is dependent upon the
      economic conditions in the Company's market area.

      Consolidation and Basis of Presentation

      The consolidated financial statements include the accounts of Horizon
      Financial Services Corporation and its wholly owned subsidiary, the Bank,
      and its wholly owned subsidiary, Horizon Investment Services, Inc. Horizon
      Investment Services, Inc. provides investment products and sells credit
      life insurance to customers of the Bank. All material intercompany
      accounts and transactions have been eliminated.

      The preparation of consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the consolidated financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.
      Material estimates that are particularly susceptible to significant
      changes relate to the determination of the allowance for losses on loans.

      Cash and Cash Equivalents

      For purposes of the statements of cash flows, the Company considers all
      short-term investments with a maturity of three months or less at date of
      purchase to be cash equivalents. Cash and cash equivalents include
      interest-earning deposits of $5,018,000 and $1,406,000 at June 30, 2001
      and 2000, respectively.


                                       20

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Earnings Per Share

      Basic earnings per share is determined using net income and weighted
      average common shares outstanding, decreased by unearned employee stock
      ownership plan (ESOP) shares. Diluted earnings per share, is computed by
      dividing net income by the weighted average common shares, decreased by
      unearned ESOP shares and increased by assumed incremental common shares
      issued. Amounts used in the determination of basic and diluted earnings
      per share for the years ended June 30, 2001, 2000, and 1999 are shown in
      table below.
                                                 2001        2000       1999
                                              ---------   ---------  ---------

Net earnings (loss)                           $ 569,603     485,532   (771,771)
                                              =========   =========  =========

Weighted average common shares outstanding      790,477     868,899    879,151
Less - unearned ESOP shares                        (236)     (7,487)   (18,768)
                                              ---------   ---------  ---------

                    Weighted average common
                        shares - basic          790,241     861,412    860,383

Assumed incremental common shares issued
     upon exercise of stock options               6,782       9,045         --
                                              ---------   ---------  ---------

                    Weighted average common
                        shares - diluted        797,023     870,457    860,383
                                              =========   =========  =========


      Securities Available-for-sale

      The Company classifies investment securities based on the Company's
      intended holding period. Securities which may be sold prior to maturity to
      meet liquidity needs, to respond to market changes or to adjust the
      Company's asset-liability position are classified as available-for-sale.
      Securities which the Company intends to hold to maturity are classified as
      held-to-maturity.

      Securities available-for-sale are recorded at fair value. The aggregate
      unrealized gains or losses, net of the effect of taxes on income, are
      recorded as a separate component of other comprehensive income until
      realized. Discounts and premiums are accreted and amortized, respectively,
      over the term of the security except for mortgage-backed and related
      securities and interest and principal only stripped mortgage-backed
      securities which are accreted and amortized over the period of estimated
      cash flows using the interest method. Actual prepayment experience on
      mortgage-backed and related securities and stripped mortgage-backed
      securities is periodically reviewed, and the timing of accretion or
      amortization is adjusted accordingly. Other than temporary unrealized
      losses are recorded in the consolidated statement of operations.

      Gain or loss on sale is recognized in the statements of operations
      using the specific identification method.

                                                                     (Continued)
                                       21

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Allowance for Losses on Loans

      The allowance for losses on loans and real estate are maintained at
      amounts considered adequate to provide for such losses. The allowance for
      losses on loans is based on management's periodic evaluation of the loan
      portfolio and reflects an amount that, in management's opinion, is
      adequate to absorb losses in the existing portfolio. In evaluating the
      portfolio, management takes into consideration numerous factors, including
      current economic conditions, prior loan loss experience, the composition
      of the loan portfolio and management's estimates of anticipated credit
      losses.

      Accrued interest receivable on loans which become more than ninety days in
      arrears is charged to income. Subsequently, interest income is not
      recognized on such loans until collected or until determined by management
      to be collectable.

      Loans Receivable

      Under the Company's credit policies, all loans with interest more than
      ninety days in arrears and restructured loans are considered to meet the
      definition of impaired loans. Loan impairment is measured based on the
      present value of expected future cash flows discounted at the loan's
      effective interest rate except, where more practical, at the observable
      market price of the loan or the fair value of the collateral if the loan
      is collateral dependent.

      Loans held for sale are stated at the lower of individual cost or
      estimated fair value. Loans are sold on a nonrecourse basis with servicing
      released and gains and losses are recognized based on the difference
      between sales proceeds and the carrying value of the loan.

      Loan Origination Fees and Related Costs

      Mortgage loan origination fees and certain direct loan origination costs,
      if material, are deferred and the net fee or cost is recognized in
      operations using the interest method. Direct loan origination costs for
      other loans are expensed as incurred, as such costs are not material.

      Real Estate

      Investment in real estate represents a limited partnership interest in a
      low income housing apartment complex, and a 50% partnership interest in a
      retail mall. The investments are carried at cost, adjusted for earnings
      and losses of the limited partnerships.

      Real estate acquired in settlement of loans is carried at the lower of
      cost or fair value. When property is acquired through foreclosure or a
      loan is considered impaired, any excess of the related loan balance over
      fair value is charged to the allowance for losses on loans. An allowance
      for real estate losses is provided as circumstances indicate additional
      loss on the property and is charged to noninterest expense.

                                                                     (Continued)
                                       22

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Financial Instruments with Off Balance Sheet Risk

      In the normal course of business to meet the financing needs of its
      customers, the Bank is a party to financial instruments with off balance
      sheet risk, which include commitments to extend credit. The Bank's
      exposure to credit loss in the event of nonperformance by the other party
      to the commitments to extend credit is represented by the contractual
      amount of those instruments. The Bank uses the same credit policies in
      making commitments 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 conditions 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. Each
      customer's creditworthiness is evaluated on a case-by-case basis. The
      amount of collateral obtained, if deemed necessary by the Bank, upon
      extension of credit is based on management's credit evaluation of the
      counterparty.

      Office Property and Equipment

      Office property and equipment are recorded at cost, and depreciation is
      accumulated on a straight-line basis over the estimated useful lives of
      the related assets. Estimated lives are forty years for office buildings
      and five to ten years for furniture, fixtures, and equipment.

      Maintenance and repairs are charged to expense as incurred. Improvements
      are capitalized and subsequently depreciated. The cost and accumulated
      depreciation of properties retired or otherwise disposed of are eliminated
      from the asset and accumulated depreciation accounts. Related gain or loss
      from such transactions is credited or charged to income.

      Treasury Stock

      Treasury stock is accounted for by the cost method, whereby shares of
      common stock reacquired are recorded at their purchase price.

      Taxes on Income

      The Company files a consolidated federal income tax return. For financial
      statement purposes, taxes on income are also presented on a consolidated
      basis. For state purposes, the Company and Horizon Investment Services,
      Inc. file income tax returns and the Bank files a franchise tax return.

      Accounting principles generally accepted in the United States of America
      require use of the asset and liability method of accounting for income
      taxes, and deferred tax assets and liabilities are recognized for the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax basis. Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the years
      in which those temporary differences are expected to be recovered or
      settled. The effect on deferred tax assets and liabilities of a change in
      tax rates is recognized in income in the period that includes the
      enactment date.

                                                                     (Continued)
                                       23

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Stock Option Plan

      The Company has adopted the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
      Compensation, which permits entities to recognize as expense over the
      vesting period the fair value of all stock-based awards on the date of
      grant. Alternatively, SFAS No. 123 also allows entities to continue to
      apply the provisions of Accounting Principles Board (APB) Opinion No. 25,
      Accounting for Stock Issued to Employees, and related interpretations and
      provide pro forma net earnings and pro forma net earnings per common share
      disclosures for employee stock option grants made subsequent to the
      adoption date as if the fair-value-based method defined in SFAS No. 123
      had been applied. APB Opinion No. 25 requires compensation expense to be
      recorded only if on the date of grant the current market price of the
      underlying stock exceeds the exercise price. The Company has made no
      option grants since the adoption of SFAS No. 123.

      Fair Value of Financial Instruments

      The Company's fair value estimates, methods and assumptions for its
      financial instruments are set forth below:

                      Cash   and Cash Equivalents and Accrued Interest
                             Receivable and Payable - The carrying amount
                             approximates the estimated fair value due to the
                             short-term nature of those instruments.

                      Securities Available-for-sale - The fair value of
                             securities available-for-sale is estimated based on
                             bid prices published in financial newspapers, bid
                             quotations received from securities dealers or
                             quoted market prices of similar instruments,
                             adjusted for differences between the quoted
                             instruments and the instruments being valued.

                      Loans  - Fair values are estimated for portfolios of loans
                             with similar financial characteristics. Loans are
                             segregated by type, such as commercial, real estate
                             and consumer.

                             The fair value of loans is calculated by
                             discounting scheduled cash flows through the
                             estimated maturity using the current rates at which
                             similar loans would be made to borrowers with
                             similar credit ratings. The estimate of maturity is
                             based on the historical experience, with repayments
                             for each loan classification, modified as required
                             by an estimate of the effect of current economic
                             and lending conditions. The effect of nonperforming
                             loans is considered in assessing the credit risk
                             inherent in the fair value estimate.

                      Federal Home Loan Bank (FHLB) Stock - The value of the
                             FHLB stock is equivalent to its carrying value
                             because the stock is redeemable at par value.

                      Deposits - The fair value of deposits with no stated
                             maturity, such as checking, savings and money
                             market accounts, is equal to the amount payable on
                             demand. The fair value of certificates of deposit
                             is based on the discounted value of contractual
                             cash flows. The discount rate is estimated using
                             the rates currently offered for deposits of similar
                             remaining maturities. The fair value estimates do
                             not include the benefit that results from the
                             low-cost funding provided by the deposit
                             liabilities compared to the cost of borrowing funds
                             in the market.

                                                                     (Continued)

                                       24

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


                      Advances from the FHLB - The fair value of advances from
                             the FHLB is calculated by discounting the scheduled
                             payments through maturity. The discount rate is
                             estimated using the rates currently offered for
                             similar instruments.

                         Off Balance Sheet Instruments - The fair value of
                             commitments to extend credit and unused lines of
                             credit is estimated using the difference between
                             current levels of interest rates and committed
                             rates.

                      Limitations - Fair value estimates are made at a specific
                             point in time, based on relevant market information
                             and information about the financial instrument.
                             Because no market exists for a significant portion
                             of the Company's financial instruments, fair value
                             estimates are based on judgments regarding future
                             expected loss experience, current economic
                             conditions, risk characteristics of various
                             financial instruments and other factors. These
                             estimates are subjective in nature and involve
                             uncertainties and matters of significant judgment
                             and, therefore, cannot be determined with
                             precision. Changes in assumptions could
                             significantly affect the estimates.

             Effect of New Accounting Standards

             SFAS No. 133, Accounting for Derivative Instruments and Hedging
             Activities, and SFAS No. 137 and SFAS No. 138, amendments to SFAS
             No. 133, was effective for the Company beginning July 1, 2000.
             Adoption of this new standard has not had a material effect on its
             financial statements.

             In July 2001, the FASB issued Statement No. 141, Business
             Combinations, and Statement No. 142, Goodwill and Other Intangible
             Assets. Statement 141 requires that the purchase method of
             accounting be used for all business combinations initiated after
             June 30, 2001 as well as all purchase method business combinations
             completed after June 30, 2001. Statement 141 also specifies
             criteria intangible assets acquired in a purchase method business
             combination must meet to be recognized and reported apart from
             goodwill, noting that any purchase price allocable to an assembled
             workforce may not be accounted for separately. Statement 142 will
             require that goodwill and intangible assets with indefinite useful
             lives no longer be amortized, but instead tested for impairment at
             least annually in accordance with the provisions of Statement 142.
             Statement 142 will also require that intangible assets with
             definite useful lives be amortized over their respective estimated
             useful lives to their estimated residual values, and reviewed for
             impairment in accordance with SFAS No. 121, Accounting for the
             Impairment of Long-Lived Assets and for Long-Lived Assets to Be
             Disposed Of.

             Reclassifications

      Certain amounts in the June 30, 2000 financial statements have been
      reclassified to conform to the presentation used in the June 30, 2001
      financial statements.


                                                                     (Continued)
                                       25
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                                 Gross               Gross
                                                       Amortized           unrealized         unrealized             Fair
                     Description                         cost                 gains             losses               value
----------------------------------------------------  -----------         -----------         -----------         -----------
<S>                                                   <C>                       <C>                 <C>               <C>
2001:
     FHLB bonds - due beyond one year,
         but within five years                        $ 1,000,000               4,500               8,344             996,156
     FHLB bonds - due beyond five years,
         but within ten years                                  --                  --                  --                  --
     Small Business Administration guaranteed
         loan participation certificates                  689,698               3,526                  --             693,224
     Mortgage-backed and related securities:
         Mortgage-backed securities                     7,923,204              68,853                  --           7,992,057
         Collateralized mortgage obligations            4,108,569              19,908                  --           4,128,477
     Mutual funds                                       1,222,718                  --                  --           1,222,718
     Equity securities                                    612,934              13,030             134,739             491,225
                                                      -----------         -----------         -----------         -----------

                                                       15,557,123             109,817             143,083          15,523,857

     Stripped mortgage-backed securities:
         Principal only                                     4,231                  --               2,971               1,260
                                                      -----------         -----------         -----------         -----------

                                                      $15,561,354             109,817             146,054          15,525,117
                                                      ===========         ===========         ===========         ===========

2000:
     FHLB bonds - due beyond one year,
         but within five years                        $   500,000                  --              57,906             442,094
     FHLB bonds - due beyond five years,
         but within ten years                             500,000                  --              74,754             425,246
     Small Business Administration guaranteed
         loan participation certificates                  710,377                  --              18,351             692,026
     Mortgage-backed and related securities:
         Mortgage-backed securities                     5,068,970                  --             133,937           4,935,033
         Collateralized mortgage obligations            7,475,355                  --             342,981           7,132,374
     Mutual funds                                       1,209,417                  --              18,600           1,190,817
     Equity securities                                  1,144,550               7,250             301,925             849,875
                                                      -----------         -----------         -----------         -----------

                                                       16,608,669               7,250             948,454          15,667,465

     Stripped mortgage-backed securities:
         Principal only                                     6,011                  --               3,357               2,654
                                                      -----------         -----------         -----------         -----------

                                                      $16,614,680               7,250             951,811          15,670,119
                                                      ===========         ===========         ===========         ===========
</TABLE>


                                                                     (Continued)
                                       26

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Sales of securities available-for-sale resulted in the following for the
      three years ended June 30:

                               2001                2000               1999
                            ----------          ---------          ---------

Proceeds                    $4,651,188          1,232,520          6,739,179
Gross realized gains            66,373             84,857            166,347
Gross realized losses           64,289            318,832            714,014
                            ==========         ==========         ==========

In 1999, the Company recognized a write down of $1,491,000 on interest
only strip mortgage-backed securities resulting from a decline in fair
value that was judged to be other than temporary. Those deemed impaired
securities were sold in fiscal year 2000.

      As of June 30, 2001, the Company had entered into a commitment to purchase
      a mortgage backed security in the amount of $1,116,600.

(3)   Loans Receivable

      At June 30, 2001 and 2000, loans receivable consisted of the following:


                                                  2001                2000
                                              -----------         -----------
Residential real estate loans:
     One-to-four-family                       $40,716,220          39,703,500
     One-to four-family held for sale             798,530                  --
     Multifamily                                1,458,223           1,234,436
     Construction                               1,380,661           1,245,413
                                              -----------         -----------

                                               44,353,634          42,183,349

Commercial real estate loans                    6,703,078           6,635,612
                                              -----------         -----------

                    Total real estate          51,056,712          48,818,961
                                              -----------         -----------

Consumer loans:
     Automobile                                 3,482,189           3,906,348
     Home improvement                             360,834             778,223
     Deposit accounts                             198,380             123,208
     Other                                      2,946,494           2,645,555
                                              -----------         -----------

                    Total consumer              6,987,897           7,453,334
                                              -----------         -----------

Commercial business loans                       7,855,852           6,547,696
                                              -----------         -----------

                                               65,900,461          62,819,991

Less:
     Deferred fees and discounts                   85,433              23,581
     Allowance for losses on loans                369,314             379,015
                                              -----------         -----------

                                              $65,445,714          62,417,395
                                              ===========         ===========

                                                                     (Continued)
                                       27

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      At June 30, 2001, the Bank had committed to originate $2,702,350 of fixed
      and variable rate loans. In addition, the Bank had customers with unused
      lines of credit totaling $2,764,700 at June 30, 2001.

      At June 30, 2001 and 2000, the Bank had nonaccrual loans of $1,393,700 and
      $1,099,000, respectively. The allowance for losses on loans related to
      these impaired loans was approximately $114,200 and $159,900,
      respectively. The average balances of such loans for the years ended June
      30, 2001, 2000 and 1999, were $1,378,000, $979,800 and $1,192,000,
      respectively. For the years ended June 30, 2001, 2000, and 1999, interest
      income which would have been recorded under the original terms of such
      loans was approximately $169,900, $144,200, and $133,900, respectively,
      and interest income actually recorded amounted to approximately $77,900,
      $78,300, and $72,000, respectively.

      Loan customers of the Bank include certain executive officers and
      directors and their related interests and associates. All loans to this
      group were made in the ordinary course of business at prevailing terms and
      conditions. Changes in loans outstanding to executive officers and
      directors for the years ended June 30, 2001 and 2000 were as follows:

                                                   2001                2000
                                                 ---------          ---------

      Balance at beginning of year               $  69,625             73,898
      Balance of newly appointed officer            50,241                 --
      Repayments                                   (14,351)            (4,273)
                                                 ---------          ---------

      Balance at end of year                     $ 105,515             69,625
                                                 =========          =========


 (4)  Allowance for Losses on Loans

      Following is a summary of the allowance for losses on loans for the three
      years ended June 30, 2001:

                                          2001          2000            1999
                                        ---------     ---------       ---------

      Balance at beginning of year     $ 379,015       342,990         348,474
      Provision for losses on loans      276,373        96,000         138,540
      Charge-offs                       (290,083)      (62,296)       (168,549)
      Recoveries                           4,009         2,321          24,525
                                       ---------     ---------       ---------

      Balance at end of year           $ 369,314       379,015         342,990
                                       =========     =========       =========


(5)   Real Estate

      Following is a summary of real estate as of June 30, 2001 and 2000:

                                                        2001            2000
                                                      --------        --------

      Real estate acquired for investment             $235,458         248,951
      Real estate acquired through foreclosure          45,000              --
                                                      --------        --------

                                                      $280,458         248,951
                                                      ========        ========



      There were no allowances for losses on real estate at June 30, 2001 and
      2000, respectively.

                                                                     (Continued)
                                       28

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


(6)  Office Property and Equipment

      At June 30, 2001 and 2000, the cost and accumulated depreciation of office
      property and equipment were as follows:

                                                   2001              2000
                                                ----------        ----------

       Land                                     $  216,595           216,595
       Office buildings                          1,477,972         1,175,525
       Furniture, fixtures and equipment         1,007,785         1,008,462
       Automobile                                   24,000            18,883
                                                ----------        ----------

                                                 2,726,352         2,419,465

       Less accumulated depreciation             1,472,611         1,369,644
                                                ----------        ----------

                                                $1,253,741         1,049,821
                                                ==========        ==========


(7)   Accrued Interest Receivable

      At June 30, 2001 and 2000, accrued interest receivable consisted of the
      following:

                                             2001            2000
                                           --------        --------

      Loans receivable                     $580,210         500,796
      Securities available-for-sale         101,973         101,969
                                           --------        --------

                                           $682,183         602,765
                                           ========        ========


(8)   Deposits

      Deposit account balances at June 30, 2001 and 2000 are summarized as
      follows:


                                              2001               2000
                                          -----------        -----------

      Balance by account type:
           Savings                        $23,680,707         23,380,371
           Money market                       313,001            342,875
           Demand and NOW                   8,679,036          8,535,229
           Certificates of deposit         37,199,182         32,502,749
                                          -----------        -----------
                                          $69,871,926         64,761,224
                                          ===========        ===========

      The aggregate amount of certificates of deposit with a minimum
      denomination of $100,000 was approximately $6,634,600 and $4,939,800 at
      June 30, 2001 and 2000, respectively.

                                                                     (Continued)
                                       29

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      At June 30, 2001, scheduled maturities of certificates of deposit were as
      follows:

                                       Years ended
                                         June 30,
                                       -----------

                     2002              $28,366,235
                     2003                6,359,020
                     2004                1,606,333
                     2005                  251,387
             2006 and thereafter           616,207
                                       -----------

                                       $37,199,182
                                       ===========




      Interest expense on deposits is summarized as follows:


                                                 Years ending June 30
                                       ----------------------------------------
                                          2001           2000           1999
                                       ----------     ----------     ----------

        Savings                        $1,026,751      1,055,175        950,097
        Money market                        8,538         10,359         12,745
        Demand and NOW                    179,401        162,401        131,810
        Certificates of deposit         2,161,663      1,481,615      1,542,291
                                       ----------     ----------     ----------

                                       $3,376,353      2,709,550      2,636,943
                                       ==========     ==========     ==========





      At June 30, 2001 and 2000, accrued interest payable on deposits totaled
      $626,893 and $352,438, respectively.

                                                                     (Continued)
                                       30

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


(9)   Advances from FHLB

      Advances from FHLB at June 30, 2001 and 2000, were as follows:

<TABLE>
<CAPTION>
                                                             2001                      2000
                                                   -----------------------  -----------------------
                                                                 Weighted-                Weighted-
                                                                  average                  average
                                                      Amount       rates       Amount       rates
                                                   -----------   --------   -----------    --------
<S>                                               <C>               <C>      <C>              <C>
         Advance maturity:
              Within one year:
                  Variable                        $        --         --    $ 1,500,000       6.79
                  Fixed                             4,000,000       5.81        899,701       5.89
              Beyond one year, but within
                  five years - Fixed                1,000,000       4.84      3,000,000       5.44
              Beyond five years, but within
                  ten years - Fixed                 4,200,000       5.18      3,200,000       5.14
              Beyond ten years, but within
                  fifteen years - Fixed               392,627       5.50        414,498       5.50
                                                   -----------   ========    -----------    =======

                                                  $ 9,592,627               $ 9,014,199
                                                   ===========               ===========
</TABLE>


      Advances from FHLB are secured by stock in FHLB and included one FHLB
      Short-term Repo Advance that matures on July 9, 2001 in the amount of
      $1,000,000. In addition, the Bank has agreed to maintain unencumbered
      additional security in the form of certain residential mortgage loans
      aggregating no less than 130% of outstanding advances. Certain advances
      are callable on various dates. Variable rate advances are based on LIBOR.

                                                                     (Continued)
                                       31

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000



(10)  Taxes on Income

      Taxes on income (benefit) for the years ended June 30, 2001, 2000, and
      1999, were as follows:

<TABLE>
<CAPTION>
                                         2001                                      2000
                        -------------------------------------     -------------------------------------
                         Federal        State         Total        Federal        State         Total
                        ---------     ---------     ---------     ---------     ---------     ---------

        <S>             <C>              <C>          <C>         <C>              <C>          <C>
        Current         $ 239,600        49,000       288,600     $ 250,100        44,000       294,100
        Deferred          (32,000)       (5,000)      (37,000)      (48,000)       (7,000)      (55,000)
                        ---------     ---------     ---------     ---------     ---------     ---------

                        $ 207,600        44,000       251,600     $ 202,100        37,000       239,100
                        =========     =========     =========     =========     =========     =========
</TABLE>

                                                 1999
                            ---------------------------------------------
                             Federal            State             Total
                            ---------         ---------         ---------

                            $(437,600)          (92,000)         (529,600)
                               49,000            14,000            63,000
                            ---------         ---------         ---------

                            $(388,600)          (78,000)         (466,600)
                            =========         =========         =========



      Taxes on income (benefit) differ from the amounts computed by applying the
      federal income tax rate of 34% to earnings before taxes on income for the
      following reasons, expressed in percentages:


                                                     Years ended June 30,
                                                ----------------------------
                                                 2001       2000       1999
                                                -------   --------   -------

       Federal income tax rate                  34.0 %      34.0     (34.0)
       Items affecting federal income tax rate:
            State tax, net of federal benefit    3.5         3.4      (4.2)
            Low income housing tax credits      (5.1)       (5.8)     (3.4)
            Other, net                          (1.8)        1.4       3.9
                                                ----        ----      ----

                                                30.6 %      33.0     (37.7)
                                                ====        ====      ====


                                                                     (Continued)
                                       32


<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and deferred tax liabilities at June
      30, 2001 and 2000 are presented below:

<TABLE>
<CAPTION>
                                                                           2001          2000
                                                                         --------      --------
           <S>                                                           <C>            <C>
           Deferred tax assets:
                Accrued expenses not deducted                            $ 67,000        50,000
                Unrealized losses on securities
                    available-for-sale                                     13,600       345,300
                State net operating loss carryforwards                     13,000        13,000
                Allowance for losses on loans                             117,000       100,000
                                                                         --------      --------

                               Total gross deferred tax assets            210,600       508,300
                                                                         --------      --------
           Deferred tax liabilities:
                FHLB stock dividends                                       23,050        34,000
                Accrued interest receivable not taxed                       3,000         3,000
                Deferred loan fees                                         99,000        91,000
                                                                         --------      --------

                               Total gross deferred tax liabilities       125,050       128,000
                                                                         --------      --------
                               Net deferred tax assets                   $ 85,550       380,300
                                                                         ========      ========
</TABLE>



      Based upon the Company's level of historical taxable income and
      anticipated future taxable income over the periods in which the deferred
      tax assets are deductible, management believes it is more likely than not,
      the Bank will realize the benefits of these deductible differences.

      At June 30, 2001 and 2000, the Bank had federal income tax bad debt
      reserves of approximately $1,263,000 which constitute allocations to bad
      debt reserves for federal income tax purposes for which no provision for
      taxes on income had been made. If such allocations are charged for other
      than bad debt losses, taxable income is created to the extent of the
      charges. The Bank's retained earnings at June 30, 2001 and 2000 were
      substantially restricted because of the effect of these income tax bad
      debt reserves.

(11)  Employee Benefits

      Pension Plan

      The Bank has a noncontributory, nontrusteed pension plan for all eligible
      employees. The plan's assets include bonds, stocks, commercial and
      residential mortgages and cash. The Bank's policy is to fund the benefit
      cost accrued.

                                                                     (Continued)
                                       33

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at June 30, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                       2001              2000
                                                                   -----------       -----------
<S>                                                                <C>                 <C>
Change in benefit obligation:
     Benefit obligation at beginning of year                       $ 1,016,486         1,388,500
     Service cost                                                       57,446            86,255
     Interest cost                                                      71,154            79,839
     Actuarial (gain)/loss                                             (15,723)         (514,755)
     Benefits paid                                                          --           (23,353)
     Other                                                            (201,579)               --
                                                                   -----------       -----------

                    Benefit obligation at end of year              $   927,784         1,016,486
                                                                   ===========       ===========

Change in plan assets:
     Fair value of plan assets at beginning of year                $ 1,272,020         1,189,278
     Actual return on plan assets                                     (122,233)          106,095
     Employer contributions                                                 --                --
     Benefits paid                                                          --           (23,353)
     Other                                                            (201,579)               --
                                                                   -----------       -----------

                    Fair value of plan assets and end of year      $   948,208         1,272,020
                                                                   ===========       ===========

Reconciliation of funded status:
     Funded status (underfunded)/overfunded                        $    20,424           255,534
     Unrecognized net actuarial (gain)/loss                           (109,217)         (359,165)
     Unrecognized transition asset                                      (9,285)          (13,064)
                                                                   -----------       -----------

                    Accrued benefit cost                           $   (98,078)         (116,695)
                                                                   ===========       ===========
</TABLE>

                                                                     (Continued)
                                       34

<PAGE>


      The net periodic benefit cost for the years ended June 30, 2001, 2000, and
      1999 includes the following components:

<TABLE>
<CAPTION>
                                                                          Years ended June 30,
                                                             -----------------------------------------
                                                                2001            2000            1999
                                                             ---------       ---------       ---------
<S>                                                          <C>                <C>             <C>
          Service cost                                       $  57,446          86,255          67,394
          Interest cost                                         71,154          79,839          65,293
          Expected return on plan assets                      (104,942)       (101,910)        (84,169)
          Recognized net actuarial gain                        (14,765)          1,378              --
          Amortization of transition (asset)/obligation         (1,761)         (1,761)         (1,761)
          Effect of special events                             (25,749)             --              --
                                                             ---------       ---------       ---------
                           Net periodic benefit cost         $ (18,617)         63,801          46,757
                                                             =========       =========       =========
</TABLE>

<TABLE>
                                                                   2001               2000
                                                              -------------      -------------
          <S>                                                 <C>                <C>
          Discount rate                                            6.25 %             7.00 %

          Expected long-term rate of return                        8.25               8.25

          Weighted-average rate of compensation increase           5.13               5.09

          Amortization method                                 Straight-line      Straight-line
                                                              =============      =============
</TABLE>

      ESOP Plan

      All employees meeting age and service requirements are eligible to
      participate in an ESOP established in June 1994. Contributions made by the
      Bank to the ESOP are allocated to participants by a formula based on
      compensation. Participant benefits become 100% vested after five years of
      service. The ESOP purchased 80,962 shares (restated for two-for-one stock
      dividend) in the Bank's conversion and is accounted for under Employers'
      Accounting for Employee Stock Ownership Plans (SOP 93-6). At June 30, 2001
      and 2000, 76,712 and 66,168 shares were allocated to the participants and
      954 and 10,544 shares were committed to be released, respectively. At June
      30, 2001, there were no unearned shares. At June 30, 2000, there were 954
      unearned shares with a fair value of approximately $6,900. ESOP expense
      was $7,743, $83,513, and $153,154 for the years ended June 30, 2001, 2000,
      and 1999, respectively.

      Employment Agreements

      The Company has entered into employment agreements, which expire in July
      2003, with two of its executive officers. The agreements provide, among
      other things, for payment to the officers of up to 299% of the officers'
      then current annual compensation in the event there is a change of control
      of the Company where employment terminates involuntarily in connection
      with such change of control.

      Stock Options

      Certain officers and directors of the Company have been granted options to
      purchase up to 89,222 shares of the Company's $.01 par common stock. The
      exercise price is equal to the fair market value of the shares at the date
      the options are granted. The options are subject to certain vesting
      requirements and, if unused, the options will expire October 2004.

                                                                     (Continued)
                                       35

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Changes in options outstanding and exercisable during 2001, 2000 and 1999
      were as follows:


                              Exercisable   Outstanding    Option price
                                options       options       per share
                                -------       -------       ---------
            June 30, 1998       30,372        45,180       5.50-6.06

            Vested              14,808            --
            Exercised             (120)         (120)
                               -------       -------

            June 30, 1999       45,060        45,060       5.50-6.06

            Vested                  --            --
            Exercised               --            --
                               -------       -------

            June 30, 2000       45,060        45,060       5.50 - 6.06

            Vested                  --            --
            Exercised               --            --
                               -------       -------

            June 30, 2001       45,060        45,060       5.50 - 6.06
                               =======       =======





      Recognition and Retention Plan

      In 1995, the Company established a recognition and retention plan (RRP)
      for certain executive officers and directors. The Company authorized the
      RRP to award shares equal to approximately 4% of the shares of common
      stock of the Company. The employees become vested in the shares of stock
      over a five-year period. All costs related to the RRP have been fully
      amortized.

(12)      Stockholders' Equity

      Stock Conversion

      In order to grant priority to eligible account holders in the event of
      future liquidation, the Bank, at the time of conversion to a stock savings
      bank, established a liquidation account, in the amount equal to the
      regulatory capital, as of March 31, 1993. In the event of the future
      liquidation of the Bank, eligible account holders who continue to maintain
      their deposit accounts shall be entitled to receive a distribution from
      the liquidation account. The total amount of the liquidation account will
      be decreased as the balance of the eligible account holders is reduced
      subsequent to the conversion, based on an annual determination of such
      balances.

                                                                     (Continued)
                                       36

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


      Regulatory Capital Requirements

      The Financial Institution Reform, Recovery and Enforcement Act of 1989
      (FIRREA) and the capital regulations of the Office of Thrift Supervision
      (OTS) promulgated thereunder require institutions to have a minimum
      regulatory tangible capital equal to 1.5% of total assets, a minimum 3%
      leverage capital ratio and a minimum 8% risk-based capital ratio. These
      capital standards set forth in the capital regulations must generally be
      no less stringent than the capital standards applicable to national banks.
      FIRREA also specifies the required ratio of housing-related assets in
      order to qualify as a savings institution.

      The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
      established additional capital requirements which require regulatory
      action against depository institutions in one of the undercapitalized
      categories defined in implementing regulations. FDICIA requires depository
      institutions to maintain a tangible equity ratio of 2%. Institutions such
      as the Bank, which are defined as well capitalized, must generally have a
      leverage capital (core) ratio of at least 5%, a tier I risk-based capital
      ratio of at least 6% and a total risk-based capital ratio of at least 10%.
      FDICIA also provides for increased supervision by federal regulatory
      agencies, increased reporting requirements for insured depository
      institutions and other changes in the legal and regulatory environment for
      such institutions. The Bank met all regulatory capital requirements at
      June 30, 2001 and 2000.

      The Bank's actual and required capital amounts and ratios as of June 30,
      2001 were as follows:

<TABLE>
<CAPTION>
                                                                                                         To be Well
                                                                               For capital            capitalized under
                                                                                adequacy              prompt corrective
                                                        Actual                  purposes              action provisions
                                               ----------------------    ----------------------     ----------------------
                                                  Amount       Ratio        Amount       Ratio         Amount      Ratio
                                               -----------   --------    -----------   --------     -----------   --------
      <S>                                      <C>              <C>      <C>              <C>       <C>             <C>
      Tangible capital (to tangible assets)    $ 6,222,000      7.1 %    $ 1,753,180      2.0 %     $        --       -- %
      Leverage/equity (core) capital
           (to adjusted tangible assets)         6,222,000      7.1        3,506,360      4.0         4,382,950      5.0
      Tier I risk-based capital
           (to risk-weighted assets)             6,222,000     11.4        2,183,240      4.0         3,274,860      6.0
      Risk-based (total) capital
           (to risk-weighted assets)             6,541,000     12.0        4,366,480      8.0         5,458,100     10.0
                                                ===========  ========     ===========   ========    ===========   ========
</TABLE>


      Dividend Restrictions

      Federal regulations impose certain limitations on the payment of dividends
      and other capital distributions by the Bank. Under the regulations, a
      savings institution, such as the Bank, that will meet the fully phased-in
      capital requirements (as defined by the OTS regulations) subsequent to a
      capital distribution is generally permitted to make such capital
      distribution without OTS approval, subject to certain limitations and
      restrictions as described in the regulations. A savings institution with
      total capital in excess of current minimum capital requirements but not in
      excess of the fully phased-in requirements is permitted by the new
      regulations to make, without OTS approval, capital distributions of
      between 25% and 75% of its net earnings for the previous four quarters
      less dividends already paid for such period. A savings institution that
      fails to meet current minimum capital requirements is prohibited from
      making any capital distributions without prior approval from the OTS.

                                                                     (Continued)
                                       37

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


(13) Supervisory Agreement

      On August 23, 1999, the Bank entered into a supervisory agreement with the
      OTS which requires certain actions by the Bank including:

      o   Implementing procedures to improve credit administration and
          documentation;

      o   Disposal of the Bank's investments classified by the OTS as high risk
          and reducing the level of the Bank's interest rate risk; and

      o   Obtaining prior approval of the OTS for payment of dividends.

      Management is proceeding with the required actions and does not believe
      these actions will have a material effect on the financial position or
      results of operations of the Company.

(14)  Fair Value of Financial Instruments

      The estimated fair values of the Company's financial instruments as of
      June 30, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>

                                                June 30, 2001                    June 30, 2000
                                        ----------------------------      ----------------------------
                                          Carrying          Fair            Carrying          Fair
                                           value            value            value            value
                                        -----------      -----------      -----------      -----------
<S>                                     <C>                <C>              <C>              <C>
Financial assets:
     Cash and cash equivalents          $ 5,591,525        5,591,525        1,981,511        1,981,511
     Securities available-for-sale       15,525,117       15,525,117       15,670,119       15,670,119
     Loans                               65,445,714       68,517,214       62,417,395       59,883,278
     FHLB stock                             480,100          480,100          702,500          702,500
     Accrued interest receivable            682,183          682,183          602,765          602,765
Financial liabilities:
     Deposits                            69,871,926       70,280,198       64,761,224       65,067,366
     FHLB advances                        9,592,627        9,583,905        9,014,199        8,167,397
     Advance payments by borrowers
         for taxes and insurance            393,550          393,550          410,555          410,555
     Accrued interest payable               653,138          653,138          352,438          352,438
                                        ===========      ===========      ===========      ===========

                                                          Unrealized                       Unrealized
                                          Notional          gains           Notional         gains
                                           value          (losses)            value         (losses)
                                        -----------      -----------      -----------     -----------

Off balance sheet assets:
     Commitments to extend credit        $2,702,350               --         880,050                --
     Unused lines of credit               2,764,700               --       1,859,443                --
                                         ==========      ===========       ==========      ===========
</TABLE>


                                                                     (Continued)
                                       38

<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


(15)  Contingency

      The Bank is involved in various legal actions and proceedings arising from
      the normal course of operations. Management believes that liability, if
      any, arising from such legal actions and proceedings will not have a
      material adverse effect upon the consolidated financial statements of the
      Company.

(16)  Horizon Financial Services Corporation (Parent Company Only) Financial
      Information

      The Parent Company's principal asset is its 100% ownership of the Bank and
      the Bank's subsidiary. The following are the condensed financial
      statements for the Parent Company:

                            Condensed Balance Sheets

<TABLE>
<CAPTION>
                                                                        2001              2000
                                                                    -----------       -----------
<S>                                                                 <C>                   <C>
Cash and cash equivalents                                           $   603,504           253,648
Securities available-for-sale                                           491,225           608,935
Loans receivable, net                                                   759,912         1,097,524
Loans receivable from subsidiary                                             --             5,593
Investment in subsidiary                                              6,275,754         5,908,105
Real estate                                                             235,458           248,951
Interest receivable                                                      56,830            35,412
Deferred tax asset                                                       58,450           119,200
                                                                    -----------       -----------

                    Total assets                                    $ 8,481,133         8,277,368
                                                                    ===========       ===========

Total liabilities - accrued income taxes                            $    34,947            11,361

Common stock                                                             10,462            10,462
Additional paid-in capital                                            5,022,511         5,020,361
Retained earnings                                                     5,565,793         5,135,636
Treasury stock, at cost                                              (2,129,894)       (1,314,197)
Unearned ESOP shares                                                         --            (5,593)
Accumulated other comprehensive
     income - net unrealized loss
     on securities available-for-sale                                   (22,686)         (580,662)
                                                                    -----------       -----------

                    Total stockholders' equity                        8,446,186         8,266,007
                                                                    -----------       -----------

                    Total liabilities and stockholders' equity      $ 8,481,133         8,277,368
                                                                    ===========       ===========
</TABLE>

                                                                     (Continued)
                                       39


<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


                       Condensed Statements of Operations


<TABLE>
<CAPTION>
                                                           2001            2000            1999
                                                        ---------       ---------       ---------
<S>                                                     <C>               <C>              <C>
Interest income                                         $ 110,589         123,502          79,472
Equity in (losses) earnings of subsidiaries               556,413         461,998        (634,347)
Other expenses                                           (155,299)       (139,968)       (311,196)
                                                        ---------       ---------       ---------

                    Net earnings (loss) before tax        511,703         445,532        (866,071)

Income tax benefit                                         57,900          40,000          94,300
                                                        ---------       ---------       ---------

                    Net earnings (loss)                 $ 569,603         485,532        (771,771)
                                                        =========       =========       =========
</TABLE>

                                                                     (Continued)

                                       40



<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2001 and 2000


                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                    2001           2000           1999
                                                                 ----------     ----------     ----------
<S>                                                              <C>               <C>           <C>
Operating activities:
     Net earnings (loss)                                         $  569,603        485,532       (771,771)
     Equity in losses (earnings) of subsidiary                     (556,413)      (461,998)       634,347
     Other, net                                                      49,627         58,574        370,614
                                                                 ----------     ----------     ----------

                    Net cash provided by operating activities        62,817         82,108        233,190
                                                                 ----------     ----------     ----------

Investing activities:
     Proceeds from sale of securities available-for-sale            661,164        197,262      1,844,763
     Purchase of securities available-for-sale                     (412,187)      (211,319)    (1,510,444)
     Principal collected on securities available-for-sale                --             --         88,340
     Purchase of real estate                                             --             --       (100,000)
     Loans receivable, net                                          343,205         15,102       (549,808)
                                                                 ----------     ----------     ----------

                    Net cash provided by (used in)
                        investing activities                        592,182          1,045       (227,149)
                                                                 ----------     ----------     ----------

Financing activities:
     Dividends from subsidiary                                      650,000             --        226,109
     Treasury stock acquired                                       (815,697)       (84,626)       (44,375)
     Exercise of stock options                                           --             --            660
     Dividends paid                                                (139,446)      (154,351)      (153,963)
                                                                 ----------     ----------     ----------

                    Net cash (used in) provided by
                        financing activities                       (305,143)      (238,977)        28,431
                                                                 ----------     ----------     ----------

                    Net increase (decrease) in
                        cash and cash equivalents                   349,856       (155,824)        34,472

Cash and cash equivalents at beginning of year                      253,648        409,472        375,000
                                                                 ----------     ----------     ----------

Cash and cash equivalents at end of year                         $  603,504        253,648        409,472
                                                                 ==========     ==========     ==========
</TABLE>

                                                                     (Continued)
                                       41
<PAGE>



                     HORIZON FINANCIAL SERVICES CORPORATION
                             STOCKHOLDER INFORMATION
--------------------------------------------------------------------------------


ANNUAL MEETING

The Annual Meeting of Stockholders will be held at 3:00 p.m. local time, on
October 25, 2001, at the main office of Horizon Federal Savings Bank, 301 First
Avenue East, Oskaloosa, Iowa.


STOCK LISTING

Horizon Financial Services Corporation common stock is traded over-the-counter
on the Nasdaq - Bulletin Board under the symbol "HZFS."


PRICE RANGE OF COMMON STOCK

The high and low bid quotations for the common stock as reported on the Nasdaq
Stock Market, as well as dividends declared per share, is reflected in the table
below. The information set forth in the table below was provided by the Nasdaq
Bulletin Board. Such information reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
                             FISCAL 2001                                         FISCAL 2000
                   -------------------------------                     ----------------------------------

                      HIGH      LOW    DIVIDENDS                         HIGH       LOW      DIVIDENDS
                   -------------------------------                     ----------------------------------
<S>                 <C>       <C>        <C>                            <C>        <C>         <C>
   First Quarter    $8.000    $6.000     $0.45     First Quarter        $9.000     $7.000      $0.45
   Second Quarter    7.250     5.780      0.45     Second Quarter        8.125      6.500       0.45
   Third Quarter     6.250     6.063      0.45     Third Quarter         7.000      6.500       0.45
   Fourth Quarter    8.010     6.250      0.45     Fourth Quarter        7.313      5.125       0.45
</TABLE>


Cash dividend payout is continually reviewed by management and the Board of
Directors. The Company intends to continue its policy of paying quarterly
dividends; however, the payment will depend upon a number of factors, including
capital requirements, regulatory limitations, the Company's financial condition,
results of operations and the Bank's ability to pay dividends to the Company.
The Company relies significantly upon such dividends originating from the Bank
to accumulate earnings for payment of cash dividends to its stockholders. See
Notes 12 and 13 to the Notes to Consolidated Financial Statements for a
discussion of restrictions on the Bank's ability to pay dividends.

At September 7, 2001, there were 751,462 shares of Horizon Financial Services
Corporation common stock issued and outstanding and approximately 140
stockholders of record.


STOCKHOLDERS AND GENERAL INQUIRIES             TRANSFER AGENT

Robert W. DeCook, President and CEO            First Bankers Trust Company, N.A.
Horizon Financial Services Corporation         1201 Broadway
301 First Avenue East                          Quincy, IL 62301
Oskaloosa, Iowa  52577                         (217) 228-8000


                                       40

<PAGE>



                     HORIZON FINANCIAL SERVICES CORPORATION
                              CORPORATE INFORMATION
--------------------------------------------------------------------------------



COMPANY AND BANK ADDRESS

  301 First Avenue East                          Telephone:       (641) 673-8328
  Oskaloosa, IA  52577                           Fax:             (641) 673-0074



DIRECTORS OF THE BOARD

Robert W. DeCook
  Chairman of the Board, President and
  Chief Executive Officer of Horizon
  Financial Services Corporation and
  Horizon Federal Savings Bank

Gary L. Rozenboom
  Self-Employed Flooring Business
  Oskaloosa, Iowa

Dwight L. Groves
  Property Manager and Retired Restaurateur
  Oskaloosa, Iowa


Thomas L. Gillespie
  Vice President of Horizon Financial
  Services Corporation and Horizon
  Federal Savings Bank


Norman P. Zimmerman
  Retired Dentist and Former Mayor of the City of
  Oskaloosa
  Oskaloosa, Iowa







HORIZON FINANCIAL SERVICES CORPORATION EXECUTIVE OFFICERS

Robert W. DeCook
  President and Chief Executive Officer

Thomas L. Gillespie
  Vice President

Vicki Hladik
  Treasurer and Chief Financial Officer





INDEPENDENT AUDITORS       CORPORATE COUNSEL

KPMG LLP                   McCoy, Faulkner & Broerman
2500 Ruan Center           216 South First Street
Des Moines, Iowa  50309    Oskaloosa, Iowa  52577



SPECIAL COUNSEL

Katten Muchin Zavis
1025 Thomas Jefferson St., N.W.
East Lobby, Suite 700
Washington, D.C. 20007-5201

                                       41

<PAGE>