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2003 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 Operations .........................    4
      Consolidated Financial Statements .............................   19
      Stockholder Information .......................................   48
      Corporate Information .........................................   50

                          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, 2003, 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 23, 2003

Dear Stockholder:

I am very pleased to report to you that our fiscal year ended June 30, 2003 was
one of strong profitability that produced an 11.48% return on equity. Our net
earnings for the year were $1,139,000, or $1.48 per share fully diluted, and
represented a return on average assets of 1.27% compared to net earnings of
$1,085,000, or $1.42 per share fully diluted, for the prior fiscal year, an
improvement of five percent. A core earnings increase of $357,500 was the
primary factor for such a successful year.

Net interest income, representing our core earnings, was $3.78 million for
fiscal 2003 compared to $3.42 million for the prior fiscal year, a 10.5%
increase during a period of decreasing interest rates. Net interest income after
provision for losses on loans in fiscal 2003 was $3.5 million compared to $3.1
million in fiscal 2002. Our average interest rate spread, the difference between
the yield earned on interest earning assets and the rates paid on interest
bearing liabilities, was 4.10% compared to 3.69% for 2002. Our net interest
margin, net interest income divided by average interest-earning assets, was
4.31% and 3.97% for the fiscal years 2003 and 2002, respectively.

Total assets increased by $2.9 million to $91.3 million and deposits increased
by $2.4 million. The increase in assets was primarily due to an increase in
securities available-for-sale of $5.1 million. Loans receivable decreased
$92,000, to $65.0 million, in an environment of heavy refinancing.

As we look forward to the coming year, we are delighted that we will soon begin
construction of a new branch office in the rapidly growing community of Pleasant
Hill, Iowa.

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 our 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,

Robert W. DeCook
President and Chief Executive Officer

RWD;hb

<PAGE>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                         At June 30,
                                                 ----------------------------------------------------------
                                                   2003         2002        2001        2000         1999
                                                 --------     --------     -------    --------     --------
                                                                       (In Thousands)
<S>                                              <C>          <C>          <C>        <C>          <C>
Selected Financial Condition Data:

Total Assets ................................    $ 91,322     $ 88,438     $89,416    $ 83,184     $ 85,023
Cash and cash equivalents ...................       5,304        8,125       5,592       1,981        7,917
Securities available-for-sale ...............      17,176       12,086      15,525      15,670       17,097
Loans receivable, net .......................      65,007       65,099      65,446      62,417       56,066
Deposits ....................................      74,423       71,954      69,872      64,761       59,576
Advances from FHLB ..........................       5,545        5,571       9,593       9,014       16,606
Stockholders' equity ........................      10,444        9,403       8,446       8,266        8,060

<CAPTION>
                                                                     Year Ended June 30,
                                                 ----------------------------------------------------------
                                                   2003         2002        2001        2000         1999
                                                 --------     --------     -------    --------     --------
                                                           (In Thousands, Except Per Share Data)
<S>                                              <C>          <C>          <C>        <C>          <C>
Selected Operations Data:

Total interest income .......................    $  5,805     $  6,152     $ 6,575    $  6,171     $  6,192
Total interest expense ......................       2,030        2,734       3,924       3,448        3,642
                                                 --------     --------     -------    --------     --------
  Net interest income .......................       3,775        3,418       2,651       2,723        2,550
Provisions for losses on loans ..............         236          332         276          96          139
                                                 --------     --------     -------    --------     --------
Net interest income after
  provision for losses on loans .............       3,539        3,086       2,375       2,627        2,411
Noninterest income
  Fees, commissions and service charges .....         648          630         595         470          497
  Gain (loss) on sale of securities, net ....          34          236           2        (234)      (2,038)
  Gain on sale of mortgage loans ............          82           63          --          --           --
  Impairment loss on equity securities ......        (183)         (80)         --          --           --
  Other noninterest income ..................          44           11          --          --            8
                                                 --------     --------     -------    --------     --------
Total noninterest income ....................         625          860         597         236       (1,533)
Total noninterest expense ...................       2,448        2,309       2,151       2,138        2,116
                                                 --------     --------     -------    --------     --------
Earnings (loss) before taxes on income ......       1,716        1,637         821         725       (1,238)
Taxes on income .............................         577          552         251         239         (466)
                                                 --------     --------     -------    --------     --------
Net earnings (loss) .........................    $  1,139     $  1,085     $   570    $    486     $   (772)
                                                 ========     ========     =======    ========     ========

Basic earnings (loss) before common share ...    $   1.52     $   1.44     $  0.72    $   0.56     ($  0.90)
Diluted earnings (loss) per common share ....    $   1.48     $   1.42     $  0.71    $   0.56     ($  0.90)
Dividends per share .........................    $   0.20     $   0.18     $  0.18    $   0.18     $   0.18
</TABLE>


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                                  -------------------------------------------------------
                                                                   2003        2002        2001        2000        1999
                                                                  -------     -------     -------     -------     -------
<S>                                                                <C>         <C>         <C>         <C>         <C>
Selected Financial Condition Data:

Performance Ratios:
  Return on assets (ratio of net earnings (loss) to
  average total assets) ......................................       1.27%       1.22%        .66%        .58%       (.88%)
  Interest rate spread information:
  Average during year ........................................       4.10        3.69        2.73        3.06        3.00
  End of year ................................................       4.30        4.10        3.03        2.86        3.03
  Net interest margin(1) .....................................       4.31        3.97        3.15        3.40        3.17
  Ratio of operating expense to average
  total assets ...............................................       2.72        2.58        2.49        2.54        2.42
  Return on stockholders' equity (ratio of
  net earnings (loss) to average equity) .....................      11.48       12.16        6.82        5.95       (9.33)
Efficiency ratio(2) ..........................................      54.80       55.98       66.27       66.96       69.26

Asset Quality Ratios:
  Non-performing assets to total assets at
  end of year(3) .............................................       3.28        2.41         .61        1.39        1.36
  Allowance for losses on loans to non-performing loans(3) ...      20.94       28.01       26.47       34.49       29.57
  Allowance for losses on loans to total
  loans ......................................................        .86         .83         .56         .61         .61

Other Ratios:
  Stockholder's equity to total assets at
  end of year ................................................      11.44       10.63        9.45        9.95        9.48
  Average stockholders' equity to average assets .............      11.04       10.04        9.68        9.71        9.46
  Average interest-earning assets to average
  interest-bearing liabilities ...............................     109.28%     108.89%     108.98%     107.83%     103.79%

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

----------

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

(2)   Noninterest expense divided by net interest income and noninterest income
      (excluding gain (loss) on sale of securities, net).

(3)   Non-performing assets consist of nonaccruing loans, accruing loans
      past-due 90 or more days and real estate owned. Non-performing loans are
      non-performing 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 issued shares of common
stock 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 extent 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, gain
on sale of mortgage loans, the establishment of provisions for losses on loans,
income derived from subsidiary activities, and 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 Mahaska and Marion County markets
are somewhat sluggish as some area employers are laying off employees while
others are cutting employees' weekly work hours from a 40 hour work week to a 32
hour work week. Currently, farm prices for both grain and livestock are
volatile, but farmers are not struggling. We are currently experiencing a
decline in some lines of retail business in the Mahaska and Marion County
markets. Local economic conditions in Polk County are better and offer the Bank
a good opportunity to extend its lending area through the Bank's new loan
production office in Pleasant Hill. However, in the event current economic and
market conditions persist or worsen in the Mahaska and Marion County markets,
loan demand and existing loans may be affected, which could adversely affect the
financial condition and the results of operations of the Company and the Bank.


                                       4
<PAGE>

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 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, 2003 Compared to June 30, 2002.

     Total assets increased $2.9 million, or 3.3%, to $91.3 million at June 30,
2003 from $88.4 million at June 30, 2002. The increase was primarily
attributable to a $5.1 million increase in securities available-for-sale, to
$17.2 million at June 30, 2003 from $12.1 million at June 30, 2002, as the Bank
focused on reducing cash and cash equivalent balances which were earning less
desirable returns and investing these dollars in higher yielding mortgage-backed
securities and investment grade corporate bonds. Accompanying this increase was
a $620,400, or 45.9% increase, in office property and equipment due to extensive
remodeling of the Bank's home office and the Bank's land purchase at 1290 Copper
Creek Drive, Pleasant Hill, Iowa for the construction of a branch office.
Partially offsetting these increases was a decrease in cash and cash equivalents
of $2.8 million to $5.3 million at June 30, 2003, from $8.1 million at June 30,
2002. Loans receivable, net decreased slightly by $92,000, as loan origination
volume for the Bank remains steady, but sales of first mortgage loan
originations to the secondary market continue to increase.

      Total liabilities increased $1.8 million, or 2.3%, to $80.9 million at
June 30, 2003 from $79.0 million at June 30, 2002, primarily the result of
increased deposits of $2.5 million to $74.4 million at June 30, 2003, from $71.9
million at June 30, 2002. Accrued income taxes decreased $490,000 and accrued
expenses and other liabilities decreased $82,500 as a result of decreased
accrued interest on deposits and a reduction in the over-accrual of the
Company's pension plan.

      Stockholders' equity increased $1.04 million, or 11.0%, during fiscal
2003, primarily due to the retention of net income as retained earnings
increased $983,000, or 15.1%. Accompanying this increase was an increase of
$176,000 for accumulated other comprehensive income. The Company paid cash
dividends totaling approximately $152,300 or $.2025 per share during fiscal
2003. The Company acquired 15,191 shares of treasury stock at $184,400, and
disbursed 10,940 shares of treasury stock, with a net value of $62,200 through
exercise of employee stock options.


                                       5
<PAGE>

      June 30, 2002 Compared to June 30, 2001.

      Total assets decreased $1.0 million, or 1.1% to $88.4 million at June 30,
2002 from $89.4 million at June 30, 2001. The decrease was reflected in a $3.4
million decrease in securities available-for-sale, to $12.1 million at June 30,
2002 from $15.5. million at June 30, 2001, primarily the result of maturing
investments and principal payments received on the Bank's investment in
mortgage-backed securities. Partially offsetting this decrease was an increase
in cash and cash equivalents of $2.5 million to $8.1 million at June 30, 2002,
from $5.6 million at June 30, 2001, as the Bank continues to build cash the
result of deposit growth and reduced reinvestment activity while the Company
continues to search for desirable investment options. Loans receivable, net
decreased $347,000, as loan origination volume for the Bank remains steady, but
sales of first mortgage loan originations to the secondary market continue to
increase.

      Total liabilities decreased $1.9 million, or 2.4%, to $79.0 million at
June 30, 2002 from $80.9 million at June 30, 2001, primarily the result of a
$4.0 million decrease in Federal Home Loan Bank ("FHLB") advances offset in part
by a $2.1 million increase in deposits. Accrued income taxes increased $299,000
in response to the substantial increase in net income for the fiscal year ended
June 30, 2002 and accrued expenses and other liabilities decreased $274,000 as a
result of decreased accrued interest on deposits.

      Stockholders' equity increased $957,000, or 11.3%, during fiscal 2002,
primarily due to the retention of net income as retained earnings which
increased $950,000, or 17.1%. The Company paid cash dividends totaling
approximately $135,000 or $.18 per share during fiscal 2002.

Results of Operations

Comparison of Fiscal Years Ended June 30, 2003 and June 30, 2002

      General. Net earnings for the fiscal year ended June 30, 2003 ("fiscal
2003") increased $53,700 to $1.14 million from $1.09 million for the fiscal year
ended June 30, 2002 ("fiscal 2002"). This increase of net earnings was primarily
attributable to increased net interest income, both before and after provisions
for losses on loans as interest rate decreases due to the current economy in the
loan portfolio continued to lag behind rate decreases imposed on deposits,
creating a very favorable spread for the Bank. Non-interest income decreased as
a result of the substantial reduction in gain on sales of securities and
increased impairment loss adjustments. Non-interest expense also increased for
fiscal 2003 over fiscal 2002. Earnings per share increased to $1.52 and $1.48 on
a basic and fully diluted basis, respectively, for fiscal 2003 compared to $1.44
and $1.42, respectively, for fiscal 2002. Earnings per share increases were due
to increased net earnings for fiscal 2003 and decreased common stock shares
outstanding of 4,251 shares.

      During fiscal 2003, the Company's return on average assets ("ROAA") and
return on average stockholders' equity ("ROAE") was 1.27% and 11.48%,
respectively, compared to 1.22% and 12.16% for fiscal 2002. Average
stockholders' equity to average assets was 11.04% during fiscal year 2003
compared to 10.04% during fiscal year 2002. The Company's dividend payout ratio
was 13.3% during fiscal 2003.

      Interest Income. Interest income was $5.8 million for fiscal 2003 and $6.2
million for fiscal 2002. Interest income on loans decreased $232,000 for fiscal
2003 reflecting the slight decrease in the average outstanding balance of loans
receivable from $65.1 million for fiscal 2002 compared to $65.0 million for
fiscal 2003, and a decrease in average yield on loans for fiscal 2003 to 7.77%
from 8.13% for fiscal 2002. Accompanying this decrease was a $73,400 decrease in
interest income on securities


                                       6
<PAGE>

available-for-sale and a $41,400 decrease in other investment income for fiscal
2003 as compared to fiscal 2002. Average balance for securities
available-for-sale for fiscal 2003 were $13.7 million compared to $13.0 million
for fiscal 2002 and the average yield on securities available-for-sale for
fiscal 2003 was 4.56% compared to 5.40% for fiscal 2002. Other interest earning
assets averaged $7.5 million and yielded .71% for fiscal 2003 compared to $6.9
million and 1.37% for fiscal 2002. The average yield on all interest-earning
assets decreased to 6.63% during fiscal 2003 from 7.15% during fiscal 2002; a 52
basis point decline.

      Interest Expense. Interest expense decreased $704,000 to $2.0 million for
fiscal 2003 compared to $2.7 million for fiscal 2002. The decrease in interest
expense was primarily due to a 94 basis point decrease in the weighted average
rate paid on deposits during fiscal 2003 as compared to fiscal 2002. The
weighted average rate paid on deposits decreased to 2.34% for fiscal 2003
compared to 3.28% for fiscal 2002. Interest on deposits decreased $621,000, or
26.3% for fiscal 2003. Contributing to the decrease in interest expense was a
decrease in interest on advances. Interest on advances decreased $83,000, or
22.4%, to $288,000 for fiscal 2003 compared to $371,000 for fiscal 2002. The
average rate paid on all interest-bearing liabilities decreased 93 basis points
to 2.53% during fiscal 2003 from 3.46% during fiscal 2002.

      Net Interest Income. Net interest income increased $357,500, or 10.5%, to
$3.8 million in fiscal 2003 from $3.4 in fiscal 2002, primarily the result of
decreased interest paid on deposits being greater than the decreased earnings
for interest on loans and interest on securities available-for-sale. The
Company's net interest margin, which is net interest income divided by average
interest-earning assets, increased 34 basis points to 4.31% for fiscal 2003 as
compared to 3.97% for fiscal 2002. During this same period, the Company's
interest rate spread increased to 4.10% for fiscal 2003 from 3.69% for fiscal
2002, also in response to decreased interest paid on deposits which were more
reactive to the markets declining interest rates than the Bank's variable-rate
loan portfolio which follows a lagging index. The ratio of the Company's average
interest-earning assets to average interest-bearing liabilities increased to
109.28% during fiscal 2003 from 108.89% during fiscal 2002.

      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 fiscal 2003, the Company recorded a
provision for losses on loans of $235,800 compared to a $331,500 provision in
fiscal 2002. 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 loan 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, 2003 and June 30, 2002 the Company's allowance for losses
on loans was $556,000 and $537,000, respectively. As of June 30, 2003, 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 $2,998,000 or 3.28% of total assets compared to $2,128,000 or 2.41% of
total assets as of June 30, 2002. The increase in non-performing assets related
primarily to a $737,000 increase in non-accruing loans past-due 90 or more days
and a $133,000 increase in repossessed


                                       7
<PAGE>

consumer property and real estate. One-to-four family non-accruing mortgage
loans increased $556,000 while all other classes of non-accruing loans increased
$181,000.

      Non-interest Income. Non-interest income decreased $236,000 to $625,000
for fiscal 2003 from $861,000 for fiscal 2002. The increase was primarily
attributable to a reduction in gain on sales of securities available-for-sale of
$203,000 for fiscal 2003 as compared to 2002 as the Company greatly reduced it
security sales activity in fiscal 2003. Contributing to the decrease in
non-interest income was an impairment write-down adjustment on securities for
fiscal 2003 of $182,700 compared to $80,400 for 2002.

      Non-interest Expense. Non-interest expense increased by $139,000 in fiscal
2003. Increases of $66,000 in compensation, payroll taxes and employee benefits,
$103,000 in office property and equipment and $22,000 in data processing
services, were offset in part by decreases in other non-interest expense of
$31,000 and decreased federal deposit insurance premiums of $11,000.

      Income Tax Expense. Income taxes increased $25,000 to $576,900 for fiscal
2003 from $551,900 for fiscal 2002. 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 2003 was
33.6%.

Comparison of Fiscal Years Ended June 30, 2002 and June 30, 2001

      General. Net earnings for fiscal 2002 increased $516,000, or 90.6%, to
$1.1 million from $570,000 for the year ended June 30, 2001 ("fiscal 2001").
This increase was attributable primarily to increased net interest income, both
before and after provisions for losses on loans, and increased non-interest
income offset in part by a moderate increase in non-interest expense. Earnings
per share increased to $1.44 and $1.42 on a basic and fully diluted basis,
respectively, for fiscal 2002, compared to $.72 and $.71, respectively, for
fiscal 2001. Earnings per share increases were due to increased net earnings for
the 2002 period as there was no stock repurchase activity for the period.

      During fiscal 2002, the Company's return on average assets ("ROAA") and
return on average stockholders' equity ("ROAE") was 1.22% and 12.16%,
respectively, compared to .66% and 6.82% for fiscal 2001. Average stockholders'
equity to average assets was 10.04% during fiscal 2002, compared to 9.68% during
fiscal 2001. The Company's dividend payout ratio was 12.5% during fiscal 2002.

      Interest Income. Interest income was $6.2 million for the fiscal 2002 and
$6.6 million for fiscal 2001. Interest income on loans decreased $139,000 for
fiscal 2002 reflecting the decrease in the average outstanding balance of loans
receivable from $65.4 million for fiscal 2001, compared to $65.1 million for
fiscal 2002, and a decrease in average yield on loans for fiscal 2002 to 8.13%
from 8.43% for fiscal 2001. Accompanying this decrease was a $254,000 decrease
in interest income on securities available for sale and a $30,000 decrease in
other investment income for fiscal 2002, as compared to fiscal 2001. The average
yield on securities available for sale and other interest income for fiscal 2002
was 5.40% and 1.37%, respectively, compared to an average yield of 6.27% and
3.01%, respectively, for fiscal 2001. The yield on all average interest-earning
assets decreased to 7.15% during fiscal 2002 from 7.81% during fiscal 2001, a 66
basis point decline.

      Interest Expense. Interest expense decreased $1.2 million to $2.7 million
for fiscal 2002, compared to $3.9 million for fiscal 2001. The decrease in
interest expense was due primarily to a 172 basis point decrease in the weighted
average rate paid on deposits during fiscal year 2002, as compared to fiscal
2001. The weighted average rate paid on deposits decreased to 3.28% for fiscal
2002, compared to 5.0% for fiscal 2001. Interest on deposits decreased $1.0
million, or 30.0%, for fiscal 2002. Contributing


                                       8
<PAGE>

to the decrease in interest expense was a decrease in interest on advances.
Interest on advances decreased $176,000, or 32.2%, to $371,000 for fiscal 2002,
compared to $547,000 for fiscal 2001. The average rate paid on all
interest-bearing liabilities decreased 162 basis points to 3.46% during fiscal
2002 from 5.08% during fiscal 2001.

      Net Interest Income. Net interest income increased $766,000, or 28.9%, to
$3.42 million in fiscal 2002 from $2.65 million in fiscal 2001, primarily the
result of decreased interest paid on deposits being greater than the decreased
earnings on interest on loans and interest on securities available-for-sale. The
Company's net interest margin, which is net interest income divided by average
interest-earning assets, increased 82 basis points to 3.97% for fiscal 2002 as
compared to 3.15% for fiscal 2001. During this same period, the Company's
interest rate spread increased to 3.69% in fiscal 2002 from 2.73% in fiscal
2001. Also in response to decreased interest paid on deposits which were more
reactive to the markets' declining interest rates than the Bank's variable rate
loan portfolio which follows a lagging index. The ratio of the Company's average
interest-earning assets to average interest-bearing liabilities decreased to
108.89% during fiscal 2002 from 108.98% during fiscal 2001.

      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 fiscal 2002, the Company recorded a
provision for losses on loans of $331,500 compared to a $276,400 provision in
fiscal 2001. 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 loan 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, 2002 and June
30, 2001 the Company's allowance for losses on loans was $537,000 and $369,000,
respectively. Due to local and national economic conditions, the Company elected
in fiscal 2002 to increase its provision for losses on loans to a greater
percentage of its overall loans receivable.

      As of June 30, 2002, the Company's non-performing assets, consisting of
non-accruing loans, accruing loans 90 days or more delinquent, real estate owned
and repossessed consumer property, totaled $2,128,000, or 2.41%, of total assets
compared to $1,443,000, or 1.61%, of total assets as of June 30, 2001. The
increase in non-performing assets related primarily to a $524,000 increase in
non-accruing loans past-due 90 or more days and a $161,000 increase in
repossessed consumer property and real estate. One-to-four family non-accruing
mortgage loans increased $417,000 while all other classes of non-accruing loans
increased $107,000.

      Non-interest Income. Non-interest income increased $252,000 to $849,000
for fiscal 2002 from $597,000 for fiscal 2001. The increase was attributable
primarily to a gain on sales of securities available for sale of $156,000 for
fiscal 2002 as compared to a gain of $2,000 on sales of securities available for
sale in fiscal 2001. Contributing to the increase in non-interest income was a
16.5% increase in fees, service charges and commissions of $98,400, to $693,600
for fiscal 2002, from $595,200 for fiscal 2001.

      Non-interest Expense. Non-interest expense increased by $147,000 in fiscal
2002. Increases of $141,000 in compensation, payroll taxes and employee
benefits, $16,500 in other real estate, $14,000 in


                                       9
<PAGE>

data processing services, and $6,000 in advertising were offset in part by
decreases in office property and equipment of $22,000 and federal deposit
insurance premiums of $9,000.

      Income Tax Expense. Income taxes increased $300,300 to $551,900 for fiscal
2002 from $251,600 for the same period in fiscal 2001. 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 2002 was 33.7%.


                                       10
<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,
                                               ---------------------------------------------------------------------------
                                                                2003                                    2002
                                               -----------------------------------     -----------------------------------
                                                 Average      Interest                   Average      Interest
                                               Outstanding     Earned/      Yield/     Outstanding     Earned/      Yield/
                                                 Balance        Paid         Rate        Balance        Paid         Rate
                                               -----------     -------      ------     -----------     -------      ------
                                                                           (Dollars in Thousands)
<S>                                              <C>           <C>           <C>         <C>           <C>           <C>
Interest-Earning Assets:
  Loans receivable(1) ....................       $65,741       $5,108        7.77%       $65,655       $5,340        8.13%
  Securities available-for-sale ..........        13,773          628        4.56         12,993          701        5.40
  Other interest-bearing assets ..........         7,525           53         .70          6,894           95        1.38
  FHLB stock .............................           509           16        3.14            489           16        3.27
                                                 -------       ------                    -------       ------
   Total interest-earning assets(1) ......        87,548        5,805        6.63         86,031        6,152        7.15
                                                 -------       ------                    -------       ------
Interest-Bearing Liabilities:
  Savings deposits .......................        32,625          542        1.61         29,036          720        2.48
  Money market deposits ..................           314            2         .64            363            5        1.38
  Demand and NOW deposits ................        11,109           61         .55          9,819           96         .98
  Certificates of deposit ................        30,505        1,137        3.73         32,824        1,542        4.70
  FHLB Advances ..........................         5,558          288        5.18          6,966          371        5.33
                                                 -------       ------                    -------       ------
   Total interest-bearing liabilities ....        80,111        2,030        2.53         79,008        2,734        3.46
                                                 -------       ------                    -------       ------

Net interest income ......................                     $3,775                                  $3,418
                                                               ======                                  ======

Net interest rate spread .................                                   4.10%                                   3.69%
                                                                             ====                                    ====

Net interest-earning assets ..............       $ 7,437                                 $ 7,023
                                                 =======                                 =======

Net interest margin(2) ...................                                   4.31%                                   3.97%
                                                                             ====                                    ====

Average interest-earning assets to
average interest-bearing liabilities .....                     109.28%                                 108.89%
                                                               ======                                  ======

<CAPTION>
                                                         Year Ended June 30,
                                               ------------------------------------
                                                                2001
                                               ------------------------------------
                                                  Average     Interest
                                               Outstanding     Earned/       Yield/
                                                  Balance       Paid          Rate
                                               -----------     -------       ------
                                                        (Dollars in Thousands)
<S>                                               <C>           <C>           <C>
Interest-Earning Assets:
  Loans receivable(1) ....................        $64,985       $5,479        8.43%
  Securities available-for-sale ..........         15,228          955        6.27
  Other interest-bearing assets ..........          3,360          101        3.01
  FHLB stock .............................             34           39        6.15
                                                  -------       ------
   Total interest-earning assets(1) ......         84,207        6,574        7.81
                                                  -------       ------
Interest-Bearing Liabilities:
  Savings deposits .......................         23,124        1,027        4.44
  Money market deposits ..................            352            9        2.56
  Demand and NOW deposits ................          8,650          179        2.07
  Certificates of deposit ................         35,442        2,162        6.10
  FHLB Advances ..........................          9,699          547        5.64
                                                  -------       ------
   Total interest-bearing liabilities ....         77,267        3,924        5.08
                                                  -------       ------

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

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

Net interest-earning assets ..............        $ 6,940
                                                  =======

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

Average interest-earning assets to
average interest-bearing liabilities .....                      108.98%
                                                                ======
</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.


                                       11
<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,
                                                   -----------------------------------------------------------------------
                                                             2003 vs. 2002                        2002 vs. 2001
                                                   --------------------------------    -----------------------------------
                                                        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 .........................      $  (8)      $(224)      $(232)      $ (10)      $  (130)      $  (140)
   Securities available-for-sale ............       (116)         43         (73)       (226)          (28)         (254)
   Other interest-earning assets ............        (12)        (30)        (42)          8           (14)           (6)
   FHLB Stock ...............................         --          --          --           5           (28)          (23)
                                                   -----       -----       -----       -----       -------       -------

     Total interest-earning assets ..........      $(136)      $(211)      $(347)      $(223)      $  (200)      $  (423)
                                                   =====       =====       =====       =====       =======       =======

Interest-bearing liabilities:
   Savings deposits .........................         21        (199)       (178)        874        (1,181)         (307)
   Money market deposits ....................         (1)         (2)         (3)          1            (5)           (4)
   Demand and NOW deposits ..................          9         (44)        (35)         50          (133)          (83)
   Certificates of deposits .................         46        (451)       (405)       (255)         (365)         (620)
   FHLB advances ............................        (83)         --         (83)       (174)           (2)         (176)
                                                   -----       -----       -----       -----       -------       -------

     Total interest-bearing liabilities .....      $  (8)      $(696)      $(704)      $ 496       $(1,686)      $(1,190)
                                                   =====       =====       =====       =====       =======       =======

Net interest income .........................                              $ 357                                 $   767
                                                                           =====                                 =======
</TABLE>


                                       12
<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.

<TABLE>
<CAPTION>
                                                                  At June 30,
                                                       ------------------------- -------
                                                         2003         2002         2001
                                                       -------      -------      -------
<S>                                                       <C>          <C>          <C>
      Weighted average yield on:

         Loans receivable, net(1) ................        7.60%        7.92%        8.49%
         Securities available-for-sale ...........        4.45         5.27         5.42
         Other interest-earning assets ...........         .09          .86         3.73
         FHLB stock ..............................        3.00         3.00         4.56
           Combined weighted average yield on
           interest-earning assets ...............        6.52         6.92         7.64

      Weighted average rate paid on:

         Savings deposits ........................        1.41         1.99         3.69
         Money market deposits ...................          --          .97         2.28
         Demand and NOW deposits .................         .35          .71         1.57
         Certificates of Deposit .................        3.30         4.06         5.81
         FHLB advances ...........................        5.21         5.21         5.49
           Combined weighted average rate paid
           on interest-bearing liabilities .......        2.22         2.82         4.64

         Spread ..................................        4.30%        4.10%        3.00%
</TABLE>

----------

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

Asset/Liability Management

      The Company currently focuses lending efforts on 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 that
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


                                       13
<PAGE>

while 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, checking
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally within its primary
market area.

      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.

      Under OTS guidelines, interest rate risk is measured using an NPV model to
estimate a thrift's market value of portfolio to equity and the impact on that
estimate of an adverse 200 basis point shift in interest rates. Unless otherwise
directed by the OTS Regional Director, institutions below $1 billion in assets
may usually rely on the quarterly NPV estimates produced by the OTS. Utilizing
this measuring concept, a deduction to risk-based capital would have been
required as of June 30, 2003 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 is an analysis of the Bank's interest rate risk as of June
30, 2003, as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point increments, up 300 basis points
and down 100 basis points and compared to Board policy limits and in accordance
with OTS regulations. Interest rate risk exposure typically has been presented
for changes of interest rates of up and down 300 basis points; however due to
the abnormally low prevailing interest rate environment, the OTS is currently
not providing NPV change estimates below minus 100 basis points. 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, 2003, the Bank's interest rate
risk was within the Board's prescribed guidelines.


                                       14
<PAGE>

                                                       At June 30,
              Change in             Board Limit            2003
            Interest Rate        (min NPV ratios)      -----------
            (Basis Points)           % Change            % Change
            -------------        ----------------      -----------

                 +300                  5.00%              12.56%
                 +200                  6.00               13.16
                 +100                  6.75               13.58
                    0                  6.75               13.84
                 -100                  6.75               13.88

      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.

Critical Accounting Policies

      The Company has identified one critical accounting policy and practice
relative to the financial condition and results of operation. This accounting
policy relates to the allowance for loan losses.

      The allowance for loan losses is based on management's opinion, and 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 the management's estimate of probable credit losses. The
allowance for loan loss is established through a provision for loss based on
management's evaluation of the risk inherent in the loan portfolio, the
composition of the portfolio, specific impaired loans, and current economic
conditions. Such evaluation, which includes a review of all loans on which full
collectibility may not be reasonably assure, considers among other matters, the
estimated net realizable value or the fair value of the underlying collateral,
economic conditions, historical loss experience, and other factors that warrant
recognition in providing for an adequate allowance for loan loss.

      In the event that management's evaluation of the level of the allowance
for loan losses is inadequate, the Company would need to increase its provision
for loan losses.

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.


                                       15
<PAGE>

      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, 2003, the Company had $4.5
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-term and long-term liquidity needs.

      Certificates of deposit scheduled to mature in a year or less at June 30,
2003 totaled $16.5 million or 55.3% 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 will retain all such deposits. At June 30,
2003, the Company had outstanding borrowings of $5.5 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $18.0 million.

      The primary investing activities of the Company include the origination of
loans and the purchase of mortgage-backed securities. At June 30, 2003, these
assets accounted for over 85.6% 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, 2003, the Bank had tangible and core capital of $8.2 million,
or 9.2% of adjusted total assets, which was approximately $6.9 million and $4.6
million above the minimum requirements of 1.5% and 4.0%, respectively. At June
30, 2003, the Bank had total risk-based capital of $8.7 million (including $8.2
million in core capital), or 14.1% of risk-weighted assets of $61.7 million.
This amount was $3.8 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. 145, Rescission of
SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Correction was
issued April 2002. This Statement rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement


                                       16
<PAGE>

related to the rescission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002. The provisions in paragraphs 8 and 9(c) of this
Statement related to Statement 13 shall be effective for transactions occurring
after May 15, 2002. All other provision of this Statement shall be effective for
financial statements issued on or after May 15, 2002. The effect of
implementation of this Statement was not material.

      SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued June 2002. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). The provisions
of this Statement are effective for exit and disposal activities that are
initiated after December 31, 2002.

      In October 2002, SFAS No. 147, Acquisitions of Certain Financial
Institutions, which amends SFAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, and no longer requires the separate recognition
and subsequent amortization of goodwill that was originally required by SFAS No.
72, was issued. SFAS No. 147 also amends SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets (such as core deposit intangibles). The
effects of implementation on the Company's financial statements were not
material.

      In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of SFAS No. 5, 57, and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002, and were not material to the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002 and have
been included in these financial statements.

      In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123. This
Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures of both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included in the
notes to these consolidated financial statements.

      In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 addresses consolidation by business
enterprises of variable interest entities that have certain characteristics. It
requires a business enterprise that has a controlling interest in a variable
interest entity (as defined by FIN 46) to include the assets, liabilities, and
results of the activities of the variable interest entity of the consolidated
financial statements of the business enterprise. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
For variable interest acquired before February 1, 2003, it applies in the first
fiscal year or interim period beginning after June 15, 2003. The impact of


                                       17
<PAGE>

adopting FIN 46 will not be material as the Company does not presently have any
variable interest entities.

      In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133
for decisions made (1) as part of the Derivatives Implementation Group process
that effectively required amendments to SFAS No. 133, (2) in connection with
other FASB projects dealing with financial instruments, and (3) in connection
with implementation issues raised in relation to the application of the
definition of a derivative, in particular, the meaning of "an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,"
the meaning of "underlying," and the characteristics of a derivative that
contains financing components. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company will adopt SFAS No. 149 as indicated
above and such adoption is not expected to have a material effect on its
financial position or results of operations.

      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or asset in some circumstances). Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of nonpublic
entities. The Company will adopt SFAS No. 150 on July 1, 2003 and such adoption
is not expected to have a material effect on its financial position or results
of operations.


                                       18
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIEs

                        Consolidated Financial Statements

                             June 30, 2003 and 2002

                   (With Independent Auditors' Report Thereon)


                                       19
<PAGE>

                          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 (the Company) as of June 30,
2003 and 2002, 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, 2003. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.


                                        /s/ KPMG LLP

Des Moines, Iowa
July 25, 3003


                                       20
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                           Consolidated Balance Sheets

                             June 30, 2003 and 2002

<TABLE>
<CAPTION>
                             Assets                                      2003              2002
                                                                     ------------      -----------
<S>                                                                  <C>                 <C>
Cash and cash equivalents                                            $  5,303,912        8,124,566
Securities available-for-sale (note 2)                                 17,176,190       12,086,313
Loans receivable, net (notes 3 and 4)                                  65,006,810       65,098,795
Real estate (note 5)                                                      638,658          417,137
Stock in Federal Home Loan Bank, at cost                                  509,200          509,200
Office property and equipment, net (note 6)                             1,971,871        1,351,486
Accrued interest receivable (note 7)                                      567,301          587,134
Deferred tax asset (note 10)                                               60,000          211,800
Accrued income taxes receivable                                            42,282               --
Prepaid expenses and other assets                                          46,109           51,576
                                                                     ------------      -----------

              Total assets                                           $ 91,322,333       88,438,007
                                                                     ============      ===========

              Liabilities and Stockholders' Equity

Deposits (note 8)                                                    $ 74,422,752       71,953,695
Advances from Federal Home Loan Bank (note 9)                           5,545,115        5,571,497
Advance payments by borrowers for taxes and insurance                     347,265          373,147
Accrued income taxes payable                                                   --          490,522
Accrued expenses and other liabilities                                    563,151          645,694
                                                                     ------------      -----------

              Total liabilities                                        80,878,283       79,034,555
                                                                     ------------      -----------

Stockholders' equity:
   Preferred stock, $0.01 par value. Authorized 250,000 shares;
      none issued                                                              --               --
   Common stock, $0.01 par value. Authorized 1,500,000 shares;
      1,046,198 shares issued                                              10,462           10,462
   Additional paid-in capital                                           5,025,598        5,025,598
   Retained earnings, substantially restricted (notes 10 and 12)        7,498,305        6,515,330
   Treasury stock, at cost (297,267 and 293,016 shares in 2003
      and 2002, respectively)                                          (2,237,884)      (2,119,466)
   Accumulated other comprehensive gain (loss) - net
      unrealized gain (loss) on securities available-for-sale             147,569          (28,472)
                                                                     ------------      -----------

                 Total stockholders' equity                            10,444,050        9,403,452
Commitments and contingencies (notes 3 and 14)
                                                                     ------------      -----------
              Total liabilities and stockholders' equity             $ 91,322,333       88,438,007
                                                                     ============      ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       21
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Operations
                    Years ended June 30, 2003, 2002, and 2001

<TABLE>
<CAPTION>
                                                            2003            2002            2001
                                                        -----------      ----------      ---------
<S>                                                     <C>               <C>            <C>
Interest income:
    Loans                                               $ 5,107,922       5,339,939      5,479,239
    Investment securities available-for-sale                627,615         701,044        955,098
    Other interest income                                    69,093         110,511        140,300
                                                        -----------      ----------      ---------
                Total interest income                     5,804,630       6,151,494      6,574,637
                                                        -----------      ----------      ---------
Interest expense:
    Deposits (note 8)                                     1,741,930       2,363,078      3,376,353
    Advance from Federal Home Loan Bank (note 9)            287,610         370,855        547,170
                                                        -----------      ----------      ---------
                Total interest expense                    2,029,540       2,733,933      3,923,523
                                                        -----------      ----------      ---------
                Net interest income                       3,775,090       3,417,561      2,651,114
    Provision for losses on loans (note 4)                  235,800         331,500        276,373
                                                        -----------      ----------      ---------
                Net interest income after provision
                   for losses on loans                    3,539,290       3,086,061      2,374,741
                                                        -----------      ----------      ---------
Noninterest income:
      Fees, service charges, and commissions                647,901         629,987        595,219
      Gain on sale of securities, net (note 2)               33,521         236,384          2,084
      Gain on sale of mortgage loans                         82,111          63,574             --
      Impairment loss on equity securities (note 2)        (182,702)        (80,360)            --
      Other                                                  43,874          11,084            814
                                                        -----------      ----------      ---------
                Total noninterest income                    624,705         860,669        598,117
                                                        -----------      ----------      ---------
Noninterest expense:
      Compensation, payroll taxes, and employee
        benefits (note 11)                                1,349,422       1,283,858      1,143,216
      Advertising                                            86,479          81,339         75,286
      Office property and equipment                         405,657         302,982        324,602
      Federal insurance premiums and special
        assessments (note 13)                                12,329          23,771         32,719
      Data processing services                              217,280         195,119        180,961
      Other real estate                                      32,298          47,243         20,472
      Other                                                 344,520         375,072        374,399
                                                        -----------      ----------      ---------
                Total noninterest expense                 2,447,985       2,309,384      2,151,655
                                                        -----------      ----------      ---------
                Earnings before taxes                     1,716,010       1,637,346        821,203
Taxes (note 10)                                             576,900         551,900        251,600
                                                        -----------      ----------      ---------
                Net earnings                            $ 1,139,110       1,085,446        569,603
                                                        ===========      ==========      =========
Basic earnings per common share                         $      1.52            1.44           0.72
Diluted earnings per common share                              1.48            1.42           0.71
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

  Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
                Income Years ended June 30, 2003, 2002, and 2001

<TABLE>
<CAPTION>
                                                                                      Additional
                                                          Preferred       Common        paid-in         Retained          Treasury
                                                            stock         stock         capital         earnings            stock
                                                          ---------       ------      ----------       ----------        ----------
<S>                                                       <C>             <C>          <C>              <C>              <C>
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 ($0.18 per share)                             --           --              --         (139,446)               --
Treasury stock acquired                                          --           --              --               --          (815,697)
ESOP shares allocated                                            --           --              --               --                --
Stock appreciation of allocated ESOP:                            --           --           2,150               --                --
                                                          ---------       ------       ---------       ----------        ----------
Balance at June 30, 2001                                         --       10,462       5,022,511        5,565,793        (2,129,894)
                                                          ---------       ------       ---------       ----------        ----------
Comprehensive income:
  Net earnings                                                   --           --              --        1,085,446                --
  Unrealized gains on securities available-for-sale              --           --              --               --                --
  Less reclassification adjustment for net realized
    gains included in net income, net of tax                     --           --              --               --                --
                                                          ---------       ------       ---------       ----------        ----------
      Total comprehensive income                                 --           --              --        1,085,446                --

Dividends declared ($0.18 per share)                             --           --              --         (135,264)               --
Stock options exercised                                          --           --           3,087             (645)           10,428
                                                          ---------       ------       ---------       ----------        ----------
Balance at June 30, 2002                                         --       10,462       5,025,598        6,515,330        (2,119,466)
                                                          ---------       ------       ---------       ----------        ----------
Comprehensive income:
  Net earnings                                                   --           --              --        1,139,110                --
  Unrealized gains on securities available-for-sale              --           --              --               --                --
  Less reclassification adjustment for net realized
    losses included in net income, net of tax                    --           --              --               --                --
                                                          ---------       ------       ---------       ----------        ----------
      Total comprehensive income                                 --           --              --        1,139,110                --

Dividends declared ($0.2025 per share)                           --           --              --         (152,277)               --

Treasury stock acquired                                          --           --              --               --          (184,448)
Stock options exercised                                          --           --              --           (3,858)           66,030
                                                          ---------       ------       ---------       ----------        ----------
Balance at June 30, 2003                                  $      --       10,462       5,025,598        7,498,305        (2,237,884)
                                                          =========       ======       =========       ==========        ==========

<CAPTION>
                                                          Unearned    Net unrealized loss
                                                            ESOP         on securities
                                                           shares      available-for-sale      Total
                                                          --------    -------------------   -----------
<S>                                                          <C>             <C>             <C>
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 ($0.18 per share)                            --                --           (139,446)
Treasury stock acquired                                         --                --           (815,697)
ESOP shares allocated                                        5,593                --              5,593
Stock appreciation of allocated ESOP:                           --                --              2,150
                                                          --------        ----------        -----------
Balance at June 30, 2001                                        --           (22,686)         8,446,186
                                                          --------        ----------        -----------
Comprehensive income:
  Net earnings                                                  --                --          1,085,446
  Unrealized gains on securities available-for-sale             --            92,041             92,041
  Less reclassification adjustment for net realized
    gains included in net income, net of tax                    --           (97,827)           (97,827)
                                                          --------        ----------        -----------
      Total comprehensive income                                --            (5,786)         1,079,660

Dividends declared ($0.18 per share)                            --                --           (135,264)
Stock options exercised                                         --                --             12,870
                                                          --------        ----------        -----------
Balance at June 30, 2002                                        --           (28,472)         9,403,452
                                                          --------        ----------        -----------
Comprehensive income:
  Net earnings                                                  --                --          1,139,110
  Unrealized gains on securities available-for-sale             --            82,505             82,505
  Less reclassification adjustment for net realized
    losses included in net income, net of tax                   --            93,536             93,536
                                                          --------        ----------        -----------
      Total comprehensive income                                --           176,041          1,315,151

Dividends declared ($0.2025 per share)                          --                --           (152,277)

Treasury stock acquired                                         --                --           (184,448)
Stock options exercised                                         --                --             62,172
                                                          --------        ----------        -----------
Balance at June 30, 2003                                        --           147,569         10,444,050
                                                          ========        ==========        ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows

                    Years ended June 30, 2003, 2002, and 2001

<TABLE>
<CAPTION>
                                                                                  2003              2002            2001
                                                                              ------------      -----------      ----------
<S>                                                                           <C>                 <C>               <C>
Cash flows from operating activities:
    Net earnings                                                              $  1,139,110        1,085,446         569,603
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Depreciation                                                             171,986          128,940         134,051
          Amortization of fees, premiums, and accretion of discounts, net           90,119           68,466          13,523
          Provision for losses on loans                                            235,800          331,500         276,373
          Loans originated for sale                                            (10,933,786)      (9,709,045)     (5,468,450)
          Proceeds on sales of loans                                            10,501,709       11,118,771       4,861,203
          Amortization of stock compensation plans                                      --               --           7,743
          Tax benefit from exercise of stock options                                    --            3,087              --
          Gain on sale or disposal of securities                                   (33,521)        (236,384)         (2,084)
          Impairment losses on securities                                          182,702           80,360              --
          Gain on sale of mortgage loans                                           (82,111)         (63,574)             --
          Loss (gain) on disposal or sale of fixed assets                            8,345              914          (3,687)
          Reinvested dividends                                                     (43,607)         (14,718)        (31,901)
          Decrease (increase) in accrued interest receivable                        19,833           95,049         (79,418)
          (Decrease) increase in accrued taxes receivable/payable                 (532,804)         258,005          (3,346)
          Deferred taxes                                                           (93,000)         (79,000)        (44,000)
          Other, net                                                                85,084         (236,328)        462,563
                                                                              ------------      -----------      ----------
                Net cash provided by operating activities                          715,859        2,831,489         692,173
                                                                              ------------      -----------      ----------

Cash flows from investing activities:
    Securities available-for-sale:
       Purchases                                                               (11,634,353)      (8,224,359)     (5,072,406)
       Proceeds from sale                                                        4,919,729        7,771,215       4,651,188
       Proceeds from maturity and principal collected                            1,709,921        3,985,189       1,476,407
    Loans to customers, net                                                         (4,661)      (1,632,521)     (2,742,445)
    Proceeds from sale of real estate                                              227,181          143,971              --
    Purchases of real estate                                                       (95,854)              --              --
    Proceeds from sale of Federal Home Loan Bank stock                                  --               --         222,400
    Purchases of Federal Home Loan Bank stock                                           --          (29,100)             --
    Proceeds from sale of office property and equipment                                 --               --          11,900
    Purchases of office property and equipment                                    (800,716)        (227,599)       (346,184)
                                                                              ------------      -----------      ----------
                Net cash (used in) provided by investing activities             (5,678,753)       1,786,796      (1,799,140)
                                                                              ------------      -----------      ----------

Cash flows from financing activities:
    Increase in deposits                                                         2,469,057        2,081,769       5,110,702
    Decrease in advance payments by borrowers for
       taxes and insurance                                                         (25,882)         (20,403)        (17,005)
    Proceeds from advances from Federal Home Loan Bank                                  --               --       3,500,000
    Principal payments on advances from Federal Home Loan Bank                     (26,382)      (4,021,130)     (2,921,572)
    Payment of dividends                                                          (152,277)        (135,264)       (139,446)
    Exercise of stock options                                                       62,172            9,783              --
    Treasury stock acquired                                                       (184,448)              --        (815,697)
                                                                              ------------      -----------      ----------
                Net cash provided by (used in) financing activities              2,142,240       (2,085,245)      4,716,982
                                                                              ------------      -----------      ----------
                Net (decrease) increase in cash and cash equivalents            (2,820,654)       2,533,040       3,610,015
Cash and cash equivalents at beginning of year                                   8,124,566        5,591,526       1,981,511
                                                                              ------------      -----------      ----------
Cash and cash equivalents at end of year                                      $  5,303,912        8,124,566       5,591,526
                                                                              ============      ===========      ==========

Supplemental disclosures of cash flow information:
    Cash paid during the year for:
       Interest                                                               $  2,063,726        3,046,638       3,623,104
       Taxes                                                                     1,073,300          372,810         298,947
    Noncash investing and financing activities:
       Transfers from loans to real estate                                         375,034          301,788          45,000
</TABLE>

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(1)   Summary of Significant Accounting Policies

      (a)   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.

            In April 2003, the Bank opened a mortgage loan origination office in
            Pleasant Hill, Iowa which serves Polk County and surrounding areas.
            The Bank has also received approval from the Office of Thrift
            Supervision to establish a retail banking office in Pleasant Hill,
            Iowa which is scheduled to open in the spring of 2004. The
            establishment of a branch office typically affects net income
            adversely in the short term until business reaches a level
            consistent with profitable operations.

      (b)   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.

      (c)   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 $4,627,783 and
            $7,374,000 at June 30, 2003 and 2002, respectively.


                                       25
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      (d)   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,
            2003, 2002, and 2001 are shown in table below.

<TABLE>
<CAPTION>
                                                     2003          2002        2001
                                                  ----------    ---------    --------
<S>                                               <C>           <C>           <C>
            Net earnings                          $1,139,110    1,085,546     569,603
                                                  ==========    =========    ========

            Weighted average common shares
                outstanding                          751,414      751,495     790,477
            Less unearned ESOP shares                     --           --        (236)
                                                  ----------    ---------    --------

                            Weighted average
                               common shares -
                               basic                 751,414      751,495     790,241

            Assumed incremental common shares
                issued upon exercise of stock
                options                               18,054       13,657       6,782
                                                  ----------    ---------    --------

                            Weighted average
                               common shares -
                               diluted               769,468      765,152     797,023
                                                  ==========    =========    ========
</TABLE>

      (e)   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.


                                       26
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

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

      (f)   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 that 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.

      (g)   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.

      (h)   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.

      (i)   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.


                                       27
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      (j)   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.

      (k)   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.

      (l)   Treasury Stock

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

      (m)   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.


                                       28
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      (n)   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.

      (o)   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 non-performing 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.


                                       29
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

            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.

      (p)   Effect of New Accounting Standards

            Statement of Financial Accounting Standards (SFAS) No. 145,
            Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and
            Technical Correction was issued April 2002. This Statement rescinds
            SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
            and an amendment of that Statement, SFAS No. 64, Extinguishments of
            Debt Made to Satisfy Sinking-Fund Requirements. This Statement also
            rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
            Carriers. This Statement amends SFAS No. 13, Accounting for Leases,
            to eliminate an inconsistency between the required accounting for
            sale-leaseback transactions and the required accounting for certain
            lease modifications that have economic effects that are similar to
            sale-leaseback transactions. This Statement also amends other
            existing authoritative pronouncements to make various technical
            corrections, clarify meanings, or describe their applicability under
            changed conditions. The provisions of this Statement related to the
            rescission of Statement 4 shall be applied in fiscal years beginning
            after May 15, 2002. The provisions in paragraphs 8 and 9(c) of this
            Statement related to Statement 13 shall be effective for
            transactions occurring after May 15, 2002. All other provision of
            this Statement shall be effective for financial statements issued on
            or after May 15, 2002. The effect of implementation of this
            Statement was not material.

            SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
            Activities, was issued June 2002. This Statement addresses financial
            accounting and reporting for costs associated with exit or disposal
            activities and nullifies Emerging Issues Task Force (EITF) Issue No.
            94-3, Liability Recognition for Certain Employee Termination
            Benefits and Other Costs to Exit an Activity (including Certain
            Costs Incurred in a Restructuring). The provisions of this Statement
            are effective for exit and disposal activities that are initiated
            after December 31, 2002.


                                       30
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

            In October 2002, SFAS No. 147, Acquisitions of Certain Financial
            Institutions, which amends SFAS No. 72, Accounting for Certain
            Acquisitions of Banking or Thrift Institutions, and no longer
            requires the separate recognition and subsequent amortization of
            goodwill that was originally required by SFAS No. 72, was issued.
            SFAS No. 147 also amends SFAS No. 144, Accounting for the Impairment
            or Disposal of Long-Lived Assets, to include in its scope long-term
            customer-relationship intangible assets (such as core deposit
            intangibles). The effects of implementation on the Company's
            financial statements were not material.

            In November 2002, the Financial Accounting Standards Board (FASB)
            issued Interpretation No. 45, Guarantor's Accounting and Disclosure
            Requirements for Guarantees, Including Indirect Guarantees of
            Indebtedness to Others, an interpretation of SFAS No. 5, 57, and 107
            and a rescission of FASB Interpretation No. 34. This Interpretation
            elaborates on the disclosures to be made by a guarantor in its
            interim and annual financial statements about its obligations under
            guarantees issued. The Interpretation also clarifies that a
            guarantor is required to recognize, at inception of a guarantee, a
            liability for the fair value of the obligation undertaken. The
            initial recognition and measurement provisions of the Interpretation
            are applicable to guarantees issued or modified after December 31,
            2002, and were not material to the Company's financial statements.
            The disclosure requirements are effective for financial statements
            of interim and annual periods ending after December 15, 2002 and
            have been included in these financial statements.

            In December 2002, the FASB issued SFAS No. 148, Accounting for
            Stock-Based Compensation - Transition and Disclosure, an amendment
            of SFAS No. 123. This Statement amends SFAS No. 123, Accounting for
            Stock-Based Compensation, to provide alternative methods of
            transition for a voluntary change to the fair value method of
            accounting for stock-based employee compensation. In addition, this
            Statement amends the disclosure requirements of SFAS No. 123 to
            require prominent disclosures of both annual and interim financial
            statements about the method of accounting for stock-based employee
            compensation and the effect of the method used on reported results.
            Certain of the disclosure modifications are required for fiscal
            years ending after December 15, 2002 and are included in the notes
            to these consolidated financial statements.

            In January 2003, the FASB issued Interpretation No. 46,
            Consolidation of Variable Interest Entities (FIN 46). FIN 46
            addresses consolidation by business enterprises of variable interest
            entities that have certain characteristics. It requires a business
            enterprise that has a controlling interest in a variable interest
            entity (as defined by FIN 46) to include the assets, liabilities,
            and results of the activities of the variable interest entity of the
            consolidated financial statements of the business enterprise. FIN 46
            applies immediately to variable interest entities created after
            January 31, 2003, and to variable interest entities in which an
            enterprise obtains an interest after that date. For variable
            interest acquired before February 1, 2003, it applies in the first
            fiscal year or interim period beginning after June 15, 2003. The
            impact of adopting FIN 46 will not be material as the Company does
            not presently have any variable interest entities.


                                       31
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

            In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No.
            133 on Derivative Instruments and Hedging Activities. SFAS No. 149
            amends SFAS No. 133 for decisions made (1) as part of the
            Derivatives Implementation Group process that effectively required
            amendments to SFAS No. 133, (2) in connection with other FASB
            projects dealing with financial instruments, and (3) in connection
            with implementation issues raised in relation to the application of
            the definition of a derivative, in particular, the meaning of "an
            initial net investment that is smaller than would be required for
            other types of contracts that would be expected to have a similar
            response to changes in market factors," the meaning of "underlying,"
            and the characteristics of a derivative that contains financing
            components. SFAS No. 149 is generally effective for contracts
            entered into or modified after June 30, 2003 and for hedging
            relationships designated after June 30, 2003. The Company will adopt
            SFAS No. 149 as indicated above and such adoption is not expected to
            have a material effect on its financial position or results of
            operations.

            In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
            Financial Instruments with Characteristics of both Liabilities and
            Equity. SFAS No. 150 established standards for how an issuer
            classifies and measures certain financial instruments with
            characteristics of both liabilities and equity. It requires that an
            issuer classify a financial instrument that is within its scope as a
            liability (or asset in some circumstances). Many of those
            instruments were previously classified as equity. SFAS No. 150 is
            effective for financial instruments entered into or modified after
            May 31, 2003, and otherwise is effective at the beginning of the
            first interim period beginning after June 15, 2003, except for
            mandatory redeemable financial instruments of nonpublic entities.
            The Company will adopt SFAS No. 150 on July 1, 2003 and such
            adoption is not expected to have a material effect on its financial
            position or results of operations.

      (q)   Reclassifications

            Certain amounts in the June 30, 2002 and 2001 financial statements
            have been reclassified to conform to the presentation used in the
            June 30, 2003 financial statements and did not result in a change to
            net earnings or total stockholder's equity.


                                       32
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(2)   Securities Available-for-sale

      Securities available-for-sale at June 30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                                                Gross          Gross
                                             Amortized       unrealized      unrealized
                 Description                    Cost            gains          losses         Fair value
      -------------------------------        ---------       ----------      ----------      -----------
<S>                                          <C>               <C>           <C>             <C>
      2003:
        Small Business
           Administration Guaranteed
           loan participation
           certificates loan
           participation certificates           593,081         30,075             --        $   623,156
        Corporate bonds                       2,539,244         63,479             --          2,602,723
        Mortgage-backed securities           11,444,568         99,224             --         11,543,792
        Mutual funds                          1,281,043             --             --          1,281,043
        Equity securities                     1,082,661         46,368          3,553          1,125,476
                                             ----------        -------        -------        -----------

                                             16,940,597        239,146          3,553        $17,176,190
                                             ==========        =======        =======        ===========

      2002:
        Small Business
           Administration Guaranteed
           loan participation
           certificates loan
           participation certificates           667,384             --            191        $   667,193
        Mortgage-backed and related
           securities:
           Mortgage-backed securities         9,007,233         41,484             --          9,048,717
           Collateralized mortgage
             Obligations                        463,926             --          1,913            462,013
        Mutual funds                          1,237,436             --             --          1,237,436
        Equity securities                       755,605         18,475        103,126            670,954
                                             ----------        -------        -------        -----------

                                             12,131,584         59,959        105,230        $12,086,313
                                             ==========        =======        =======        ===========
</TABLE>

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

                                     2003            2002           2001
                                  ----------      ---------      ---------

      Proceeds                    $4,919,279      7,771,215      4,651,188
      Gross realized gains            64,905        250,141         66,373
      Gross realized losses           31,384         13,757         64,289


                                       33
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      In 2003 and 2002, the Company recognized a write down of $182,702 and
      $80,360, respectively, on equity securities resulting from a decline in
      fair value that was judged to be other than temporary.

(3)   Loans Receivable

      At June 30, 2003 and 2002, loans receivable consisted of the following:

                                                    2003            2002
                                                -----------      ----------

      Residential real estate loans:
          One-to-four family                    $34,207,391      38,294,960
          One-to-four family held-for-sale          767,394         258,346
          Multifamily                               795,932       1,362,607
          Construction                            2,356,946       1,474,881
                                                -----------      ----------

                                                 38,127,663      41,390,794

      Commercial real estate loans                7,117,027       7,020,223
                                                -----------      ----------

                      Total real estate          45,244,690      48,411,017
                                                -----------      ----------

      Consumer loans:
          Automobile                              2,996,073       3,170,629
          Home improvement                           85,927         299,297
          Deposit accounts                          296,876         264,790
          Other                                   3,655,966       3,121,570
                                                -----------      ----------

                      Total consumer              7,034,842       6,856,286
                                                -----------      ----------

      Commercial business loans                  13,308,135      10,385,968
                                                -----------      ----------

                                                 65,587,667      65,653,271
      Less:
          Deferred fees and discounts                25,231          17,243
          Allowance for losses on loans             555,626         537,233
                                                -----------      ----------

                                                $65,006,810      65,098,795
                                                ===========      ==========

      At June 30, 2003 and 2002, the Company had committed to originate
      $4,497,325 and $1,051,050, respectively, of fixed and variable rate loans.
      In addition, the Company had customers with unused lines of credit
      totaling $2,036,956 and $2,421,846 at June 30, 2003 and 2002,
      respectively.

      At June 30, 2003 and 2002, the Company had nonaccrual loans of $2,655,000
      and $1,917,000, respectively. The allowance for losses on loans related to
      these impaired loans was approximately $196,000 and $148,000,
      respectively. The average balances of such loans for the years ended June
      30, 2003, 2002, and 2001 were $2,450,000, $1,716,000, and $1,378,000,
      respectively. For the years ended June 30, 2003, 2002 and 2001, interest
      income which would have been recorded under the original terms


                                       34
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      of such loans was approximately $291,000, $198,000, and $170,000,
      respectively, and interest income actually recorded amounted to
      approximately $133,000, $92,000, and $78,000, respectively.

      Loan customers of the Company 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, 2003 and 2002 were as follows:

                                                    2003           2002
                                                  --------       --------

      Balance at beginning of year                $ 47,802        105,515
      Balance of new officer loan                   34,708             --
      Repayments                                   (30,029)       (57,713)
                                                  --------       --------

      Balance at end of year                      $ 52,481         47,802
                                                  ========       ========

(4)   Allowance for Losses on Loans

      Following is a summary of the allowance for losses on loans for the three
      years ended June 30, 2003:

                                          2003         2002         2001
                                       ---------     --------     --------

      Balance at beginning of year     $ 537,233      369,314      379,015
      Provision for losses on loans      235,800      331,500      276,373
      Charge-offs                       (222,793)    (164,223)    (290,083)
      Recoveries                           5,386          642        4,009
                                       ---------     --------     --------

      Balance at end of year           $ 555,626      537,233      369,314
                                       =========     ========     ========

(5)   Real Estate

      Following is a summary of real estate as of June 30, 2003 and 2002:

                                                    2003        2002
                                                  --------    -------

      Real estate acquired for investment         $295,124    210,787
      Real estate acquired through foreclosure     343,534    206,350
                                                  --------    -------

                                                  $638,658    417,137
                                                  ========    =======


                                       35
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(6)   Office Property and Equipment

      At June 30, 2003 and 2002, the cost and accumulated depreciation of office
      property and equipment were as follows:

                                               2003          2002
                                            ----------    ---------

      Land                                  $  547,467      216,595
      Office buildings                       1,699,219    1,483,776
      Furniture, fixtures, and equipment     1,238,677    1,058,320
      Automobile                                24,000       24,000
                                            ----------    ---------

                                             3,509,363    2,782,691

      Less accumulated depreciation          1,537,492    1,431,205
                                            ----------    ---------

                                            $1,971,871    1,351,486
                                            ==========    =========

(7)   Accrued Interest Receivable

      At June 30, 2003 and 2002, accrued interest receivable consisted of the
      following:

                                                      2003           2002
                                                    --------       -------

      Loans receivable                              $476,569       528,354
      Securities available-for-sale                   90,732        58,780
                                                    --------       -------

                                                    $567,301       587,134
                                                    ========       =======

(8)   Deposits

      Deposit account balances at June 30, 2003 and 2002 are summarized as
      follows:

                                                   2003            2002
                                               -----------      ----------

      Balance by account type:
          Savings                              $32,720,341      31,754,018
          Money market                             212,407         463,750
          Demand and NOW                        11,561,957      10,363,591
          Certificates of deposit               29,928,047      29,372,336
                                               -----------      ----------

                                               $74,422,752      71,953,695
                                               ===========      ==========

      The aggregate amount of certificates of deposit with a minimum
      denomination of $100,000 was approximately $3,239,328 and $3,208,885 at
      June 30, 2003 and 2002, respectively.


                                       36
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      At June 30, 2003, scheduled maturities of certificates of deposit were as
      follows:

                  Years ended June 30:
                      2004                         $16,546,451
                      2005                           5,146,653
                      2006                           1,496,951
                      2007                           3,244,993
                      2008 and thereafter            3,492,999
                                                   -----------

                                                   $29,928,047
                                                   ===========

      Interest expense on deposits is summarized as follows:

                                              Years ending June 30,
                                      ------------------------------------
                                         2003          2002         2001
                                      ----------    ---------    ---------

      Savings                         $  542,537      720,012    1,026,751
      Money market                         1,767        5,037        8,538
      Demand and NOW                      60,912       95,824      179,401
      Certificates of deposit          1,136,714    1,542,205    2,161,663
                                      ----------    ---------    ---------

                                      $1,741,930    2,363,078    3,376,353
                                      ==========    =========    =========

      At June 30, 2003 and 2002, accrued interest payable on deposits totaled
      $306,246 and $340,433, respectively.


                                       37
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(9)   Advances from FHLB

      Advances from FHLB at June 30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                              2003                         2002
                                   --------------------------   --------------------------
                                                  Weighted                     Weighted
                                     Amount     average rates     Amount     average rates
                                   ----------   -------------   ----------   -------------
<S>                                <C>              <C>         <C>              <C>
      Advance maturity:
          Within one year:
             Fixed                 $1,025,785       4.86%       $   26,382       5.50%
          Beyond one year,
             but within five
             years - fixed          3,118,528       5.32         1,112,199       4.91
          Beyond five years,
             but within ten
             years - fixed          1,389,872       4.94         4,379,734       5.19
          Beyond ten years,
             but within
             fifteen years -
             fixed                     10,930       5.50            53,182       5.50
                                   ----------                   ----------

                                   $5,545,115                   $5,571,497
                                   ==========                   ==========
</TABLE>

      Advances from FHLB are secured by stock in FHLB. 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.


                                       38
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(10)  Taxes

      Taxes on income (benefit) for the years ended June 30, 2003, 2002, and
      2001 were as follows:

<TABLE>
<CAPTION>
                                 2003                                    2002
                  -----------------------------------    -------------------------------------
                   Federal       State        Total       Federal        State         Total
                  ---------    ---------    ---------    ---------     ---------     ---------
<S>               <C>             <C>         <C>         <C>            <C>          <C>
      Current     $ 443,000       86,950      529,950      579,900        95,000       674,900
      Deferred       40,900        6,050       46,950     (107,000)      (16,000)     (123,000)
                  ---------    ---------    ---------    ---------     ---------     ---------

                  $ 483,900       93,000      576,900      472,900        79,000       551,900
                  =========    =========    =========    =========     =========     =========

<CAPTION>
                                 2001
                  -----------------------------------
                   Federal       State        Total
                  ---------    ---------    ---------
<S>               <C>             <C>         <C>
                  $ 239,600       49,000      288,600
                    (32,000)      (5,000)     (37,000)
                  ---------    ---------    ---------

                  $ 207,600       44,000      251,600
                  =========    =========    =========
</TABLE>

      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,
                                                 ------------------------------
                                                  2003        2002        2001
                                                 ------      ------      ------

      Federal income tax rate                      34.0%       34.0%       34.0%
      Items affecting Federal income tax rate:
          State tax, net of Federal benefit         3.6         3.2         3.5
          Low income housing tax credits           (2.5)       (2.6)       (5.1)
          Other, net                               (1.5)       (0.9)       (1.8)
                                                 ------      ------      ------

                                                   33.6%       33.7%       30.6%
                                                 ======      ======      ======


                                       39
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and deferred tax liabilities at June
      30, 2003 and 2002 are presented below:

<TABLE>
<CAPTION>
                                                                  2003        2002
                                                                --------    --------
<S>                                                             <C>          <C>
      Deferred tax assets:
          Accrued expenses not deducted                         $ 50,000      83,000
          Unrealized losses on securities available-for-sale          --      16,850
          State net operating loss carryforwards                  13,000      12,000
          Allowance for losses on loans                          207,000     200,000
          Impairment on stock investments                         22,000      31,000
                                                                --------    --------

                      Total gross deferred tax assets            292,000     342,850
                                                                --------    --------

      Deferred tax liabilities:
          FHLB stock dividends                                    23,000      23,050
          Unrealized gains on securities available-for-sale       88,000          --
          Accrued interest receivable not taxed                    1,000       2,000
          Deferred loan fees                                      77,000      85,000
          Depreciation                                            43,000      21,000
                                                                --------    --------

                      Total gross deferred tax liabilities       232,000     131,050
                                                                --------    --------

                      Net deferred tax assets                   $ 60,000     211,800
                                                                ========    ========
</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, 2003 and 2002, the Bank had Federal income tax bad debt
      reserves of approximately $1,263,000 that 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, 2003 and 2002 were
      substantially restricted because of the effect of these income tax bad
      debt reserves.

(11)  Employee Benefits

      (a)   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.


                                       40
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

            The following table sets forth the plan's funded status and amounts
            recognized in the consolidated financial statements at June 30, 2003
            and 2002:

<TABLE>
<CAPTION>
                                                                             2003            2002
                                                                         -----------     -----------
<S>                                                                      <C>               <C>
            Change in benefit obligation:
                Benefit obligation at beginning of year                  $ 1,304,807         927,784
                Service cost                                                  54,782          57,617
                Interest cost                                                 89,920          57,987
                Actuarial (gain) loss                                        325,969        (133,201)
                Benefits paid                                                (40,444)         (3,370)
                Other                                                             --         397,990
                                                                         -----------     -----------

                            Benefit obligation at end of year            $ 1,735,034       1,304,807
                                                                         ===========     ===========

            Change in plan assets:
                Fair value of plan assets at beginning of year           $ 1,449,706         948,208
                Actual return on plan assets                                 (78,095)        106,878
                Employer contributions                                        31,080              --
                Benefits paid                                                (40,444)         (3,370)
                Other                                                             --         397,990
                                                                         -----------     -----------

                            Fair value of plan assets and end of year    $ 1,362,247       1,449,706
                                                                         ===========     ===========

            Reconciliation of funded status:
                Funded status (underfunded) overfunded                   $  (372,787)        144,899
                Unrecognized net actuarial (gain) loss                       251,953        (270,207)
                Unrecognized transition asset                                 (6,391)         (7,838)
                                                                         -----------     -----------

                            Accrued benefit cost                         $  (127,225)       (133,146)
                                                                         ===========     ===========
</TABLE>

            The net periodic benefit cost for the years ended June 30, 2003,
            2002, and 2001 includes the following components:

<TABLE>
<CAPTION>
                                                         Years ended June 30,
                                                -------------------------------------
                                                   2003          2002          2001
                                                ---------     ---------     ---------
<S>                                             <C>              <C>           <C>
            Service cost                        $  54,782        57,617        57,446
            Interest cost                          89,920        57,987        71,154
            Expected return on plan assets       (110,785)      (78,227)     (104,942)
            Recognized net actuarial gain          (7,311)         (862)      (14,765)
            Amortization of transition asset       (1,447)       (1,447)       (1,761)
            Effect of special events                   --            --       (25,749)
                                                ---------     ---------     ---------

                   Net periodic (benefit)
                      cost                      $  25,159        35,068       (18,617)
                                                =========     =========     =========
</TABLE>


                                       41
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

<TABLE>
<CAPTION>
                                                                       2003              2002
                                                                   -------------     -------------
<S>                                                                <C>               <C>
            Discount rate                                              5.75%             7.00%
            Expected long-term rate of return                          7.50              7.75
            Weighted average rate of compensation increase             4.73              5.16
            Amortization method                                    Straight-line     Straight-line
</TABLE>

      (b)   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, 2003 and 2002, 57,200 and
            57,200 shares were allocated to the participants and zero and 954
            shares were committed to be released, respectively. At June 30, 2003
            and 2002, there were no unearned shares. ESOP expense was $0, $0,
            and $7,743 for the years ended June 30, 2003, 2002, and 2001,
            respectively.

      (c)   Employment Agreements

            The Company has entered into employment agreements, which expire in
            July 2006, 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.

      (d)   Stock Options

            Certain officers and directors of the Company have been granted
            options to purchase up to 31,800 shares of the Company's $0.01 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.


                                       42
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

            Changes in options outstanding and exercisable during 2003, 2002,
            and 2001 were as follows:

<TABLE>
<CAPTION>
                                 Exercisable        Outstanding       Option price        Weighted
                                   options            options           per share       average price
                                 -----------        -----------       ------------      -------------
<S>                                <C>               <C>              <C>                   <C>
            June 30, 2000           45,060            45,060          $5.50 - 6.06          5.55
            Vested                      --                --
            Exercised                   --                --
                                   -------           -------

            June 30, 2001           45,060            45,060           5.50 - 6.06          5.55
            Vested                      --                --
            Expired                   (600)             (600)              5.50             5.50
            Exercised               (1,720)           (1,720)              5.69             5.69
                                   -------           -------

            June 30, 2002           42,740            42,740           5.50 - 6.06          5.55
            Vested                      --                --
            Expired                     --                --
            Exercised              (10,940)          (10,940)          5.50 - 6.06          5.68
                                   -------           -------

            June 30, 2003           31,800            31,800           5.50 - 6.06          5.50
                                   =======           =======
</TABLE>

(12)  Stockholders' Equity

      (a) 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.

      (b) 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.


                                       43
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

            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, 2003 and 2002.

            The Bank's actual and required capital amounts and ratios as of June
            30, 2003 were as follows:

<TABLE>
<CAPTION>
                                                                                                 To be well capitalized under
                                                                          For capital adequacy     prompt corrective action
                                                      Actual                     purposes                 provisions
                                               ---------------------      ---------------------  ----------------------------
                                                 Amount        Ratio        Amount        Ratio        Amount        Ratio
<S>                                            <C>             <C>        <C>              <C>       <C>             <C>
            Tangible capital (to
                tangible assets)               $8,203,000       9.2%      $1,788,340       2.0%      $       --        --
            Leverage/equity (core)
                capital (to adjusted
                tangible assets)                8,203,000       9.2        3,576,680       4.0        4,470,850       5.0%
            Tier I risk-based capital (to
                risk-weighted assets)           8,203,000      13.3        2,469,480       4.0        3,704,220       6.0
            Risk-based (total) capital
                (to risk-weighted
                assets)                         8,732,000      14.1        4,938,960       8.0        6,173,700      10.0
</TABLE>

      (c)   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.


                                       44
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(13)  Fair Value of Financial Instruments

      The estimated fair values of the Company's financial instruments as of
      June 30, 2003 and 2002 were as follows:

<TABLE>
<CAPTION>
                                                2003                                   2002
                                  --------------------------------       -------------------------------
                                  Carrying value        Fair value       Carrying value       Fair value
                                  --------------        ----------       --------------       ----------
<S>                                 <C>                 <C>                <C>                <C>
      Financial assets:
          Cash and cash
             equivalents            $ 5,303,912          5,303,912          8,124,566          8,124,566
          Securities
             available-for-
             sale                    17,176,190         17,176,190         12,086,313         12,086,313
          Loans                      65,006,810         67,955,222         65,098,795         67,147,492
          FHLB stock                    509,200            509,200            509,200            509,200
          Accrued interest
             receivable                 567,301            567,301            587,134            587,134
      Financial liabilities:
          Deposits                   74,422,752         75,144,662         71,953,695         72,391,893
          FHLB advances               5,545,115          6,195,028          5,571,497          5,782,251
          Advance
             payments by
             borrowers for
             taxes and
             insurance                  347,265            347,265            373,147            373,147
          Accrued interest
             payable                    306,246            306,244            340,433            340,433

<CAPTION>
                                                        Unrealized          National          Unrealized
                                  National value      Gains (losses)          Value         gains (losses)
                                  --------------      --------------     --------------     --------------
<S>                                 <C>                 <C>                <C>                <C>
      Off balance sheet
          assets:
          Commitments to
             extend credit          $ 4,497,325                 --          1,051,050                 --
          Unused lines of
             credit                   2,036,956                 --          2,421,840                 --
</TABLE>

(14)  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.


                                       45
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

(15)  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>
                                                                          2003             2002
                                                                      ------------     ------------
<S>                                                                   <C>                 <C>
      Cash and cash equivalents                                       $    200,883          279,787
      Securities available-for-sale                                        606,976          670,954
      Loans receivable, net                                                989,447          905,419
      Investment in subsidiary                                           8,318,106        7,263,499
      Real estate                                                          199,270          210,787
      Interest receivable                                                   47,804           53,375
      Deferred tax asset                                                    25,775           74,500
      Accrued income taxes receivable                                       55,789               --
                                                                      ------------     ------------

                      Total assets                                    $ 10,444,050        9,458,321
                                                                      ============     ============

      Accrued income taxes payable                                    $         --           54,869
      Common stock                                                          10,462           10,462
      Additional paid-in capital                                         5,025,598        5,025,598
      Retained earnings                                                  7,498,305        6,515,330
      Treasury stock, at cost                                           (2,237,884)      (2,119,466)
      Accumulated other comprehensive income - net unrealized loss
          on securities available-for-sale                                 147,569          (28,472)
                                                                      ------------     ------------

                      Total stockholders' equity                        10,444,050        9,403,452
                                                                      ------------     ------------

                      Total liabilities and stockholders' equity      $ 10,444,050        9,458,321
                                                                      ============     ============
</TABLE>

                       Condensed Statements of Operations

<TABLE>
<CAPTION>
                                                    2003            2002            2001
                                                 -----------     -----------     -----------
<S>                                              <C>               <C>              <C>
      Interest income                            $   117,680         114,049         110,589
      Equity in earnings of subsidiaries           1,196,807       1,016,637         556,413
      Gain (loss) on sale of securities               18,924         207,645         (31,817)
      Other expenses                                (113,149)       (198,525)       (123,482)
      Impairment loss on equity securities          (182,702)        (80,360)             --
                                                 -----------     -----------     -----------

                      Net earnings before tax      1,037,560       1,059,446         511,703

      Income tax benefit                             101,550          26,000          57,900
                                                 -----------     -----------     -----------

                      Net earnings               $ 1,139,110       1,085,446         569,603
                                                 ===========     ===========     ===========
</TABLE>


                                       46
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2003 and 2002

                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                          2003            2002             2001
                                                       -----------     -----------     -----------
<S>                                                    <C>              <C>               <C>
      Operating activities:
          Net earnings                                 $ 1,139,110       1,085,446         569,603
          Equity in earnings of subsidiary              (1,196,807)     (1,016,637)       (556,413)
          (Gain) loss on sale of securities                (18,924)       (207,645)         31,817
          Impairment losses on securities                  182,702          80,360              --
          Tax benefit from exercise of stock
             option                                             --           3,087              --
          Other, net                                       (85,570)         28,674          17,810
                                                       -----------     -----------     -----------

                      Net cash provided by (used
                         in) operating activities           20,511         (26,715)         62,817
                                                       -----------     -----------     -----------

      Investing activities:
          Proceeds from sale of securities
             available-for-sale                          1,202,268       2,339,371         661,164
          Purchase of securities available-for-sale     (1,193,102)     (2,365,385)       (412,187)
          Loans receivable, net                            (84,028)       (145,507)        343,205
                                                       -----------     -----------     -----------

                      Net cash (used in) provided
                         by investing activities           (74,862)       (171,521)        592,182
                                                       -----------     -----------     -----------

      Financing activities:
          Dividends from subsidiary                        250,000              --         650,000
          Treasury stock acquired                         (184,448)             --        (815,697)
          Exercise of stock options                         62,172           9,783              --
          Dividends paid                                  (152,277)       (135,264)       (139,446)
                                                       -----------     -----------     -----------

                      Net cash used in financing
                         activities                        (24,553)       (125,481)       (305,143)
                                                       -----------     -----------     -----------

                      Net (decrease) increase in
                         cash and cash equivalents         (78,904)       (323,717)        349,856

      Cash and cash equivalents at beginning of
          year                                             279,787         603,504         253,648
                                                       -----------     -----------     -----------

      Cash and cash equivalents at end of year         $   200,883         279,787         603,504
                                                       ===========     ===========     ===========
</TABLE>


                                       47
<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 23, 2003, 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 2003                                                FISCAL 2002
                    ----------------------------------                         ----------------------------------
                      HIGH         LOW       DIVIDENDS                           HIGH         LOW       DIVIDENDS
                    --------     -------     ---------                         -------      -------     ---------
<S>                 <C>          <C>          <C>          <C>                 <C>          <C>          <C>
First Quarter       $10.600      $10.050      $  .050      First Quarter       $ 8.010      $ 7.000      $  .045
Second Quarter       11.060       10.050         .050      Second Quarter        7.870        7.020         .045
Third Quarter        12.450       11.100         .050      Third Quarter         9.500        7.800         .045
Fourth Quarter       13.000       11.000        .0525      Fourth Quarter       10.850        9.000         .045
</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
Note 12 of the Notes to Consolidated Financial Statements for a discussion of
restrictions on the Bank's ability to pay dividends.

At September 5, 2003, there were 764,111 shares of Horizon Financial Services
Corporation common stock issued and outstanding and approximately 130
stockholders of record.


                                       48
<PAGE>

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


                                       49
<PAGE>

                     HORIZON FINANCIAL SERVICES CORPORATION
                              CORPORATE INFORMATION

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

<TABLE>
<S>                         <C>                              <C>
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                                       Thomas L. Gillespie
   Chairman of the Board, President and Chief              Vice President of Horizon Financial Services
   Executive Officer of Horizon Financial Services         Corporation and Horizon Federal Savings
   Corporation and Horizon Federal Savings Bank            Bank
Gary L. Rozenboom                                      Norman P. Zimmerman
   Self-Employed Flooring Business                         Retired Dentist and Former Mayor of the City
   Oskaloosa, Iowa                                         of Oskaloosa
                                                           Oskaloosa, Iowa
Michael F. Cooney, III
   Retired Partner with KPMG LLP
   West Des Moines, Iowa

HORIZON FINANCIAL SERVICES CORPORATION EXECUTIVE OFFICES

Robert W. DeCook                                       Vicki Hladik
   President and Chief Executive Officer                   Treasurer and Chief Financial Officer

INDEPENDENT AUDITORS        CORPORATE COUNSEL                SPECIAL COUNSEL

KPMG LLP                    McCoy, Faulkner & Broerman       Katten Muchin Zavis Rosenman
666 Grand Avenue            216 South First Street           1025 Thomas Jefferson Street, NW
Suite 2500                  Oskaloosa, Iowa 52577            East Lobby, Suite 700
Des Moines, IA 50309                                         Washington, DC 20007-5201
</TABLE>


                                       50