Exhibit 13

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2002 ANNUAL REPORT

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[LOGO]






                           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................................... 20
         Stockholder Information............................................. 45
         Corporate Information............................................... 46






                          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,  2002,  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 24, 2002



Dear Stockholder:

I am very pleased to report to you that our fiscal year ended June 30, 2002, was
one of highly increased  profitability,  that produced a 12.2% return on equity.
Our net earnings for the year were $1,085,000,  representing a return on average
assets of 1.22%, compared to net earnings of $570,000 for the prior fiscal year,
an  improvement  of 90.6%.  The fact that core earnings  increased  $766,000 and
non-interest  income  increased  $252,000  were  the  major  factors  for such a
successful year.

Net interest  income,  representing  our core  earnings,  was $3.42  million for
fiscal  2002,  compared to $2.65  million  for the prior  fiscal  year,  a 28.9%
increase during a period of decreasing interest rates. Net interest income after
provision  for losses on loans in fiscal 2002 was $3.1 million  compared to $2.4
million in fiscal 2001. Our average interest rate spread, the difference between
the yield  earned on  interest  earning  assets and the rates  paid on  interest
bearing  liabilities,  was 3.69%,  compared to 2.73% for 2001.  Our net interest
margin,  net interest  income divided by average  interest-earning  assets,  was
3.97% and 3.15% for the fiscal years 2002 and 2001, respectfully. Fee income was
$694,000,  an increase of $99,000 or 16.6% from  fiscal  2001,  the result of an
increased number of fee-based accounts and enhanced fee collection efforts.

Total assets decreased by $1.0 million to $88.4 million,  but deposits increased
by $2.1 million.  The decrease in assets was mainly due to a $4 million decrease
in advances  from the Federal  Home Loan Bank to $5.6  million from $9.6 million
for fiscal 2001. Loans receivable decreased $347,000, to $65.1 million.

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,



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




<PAGE>


<TABLE>
<CAPTION>

                                              SELECTED CONSOLIDATED FINANCIAL INFORMATION

                                                                               At June 30,
                                                     ----------------------------------------------------------------
                                                          2002          2001         2000       1999          1998
                                                     ------------ ------------- ------------ ------------ -----------
                                                                                (In Thousands)
<S>                                                     <C>          <C>          <C>        <C>            <C>
Selected Financial Condition Data:
---------------------------------
Total Assets .....................................      $ 88,438     $ 89,416     $ 83,184    $ 85,023       $ 89,947
Cash and cash equivalents ........................         8,125        5,592        1,981       7,917          6,367
Securities available-for-sale ....................        12,086       15,525       15,670      17,097         23,922
Loans receivable, net ............................        65,099       65,446       62,417      56,066         55,996
Deposits .........................................        71,954       69,872       64,761      59,576         60,145
Advances from FHLB ...............................         5,571        9,593        9,014      16,606         20,038
Stockholders' equity .............................         9,403        8,446        8,266       8,060          8,488

                                                                           Year Ended June 30,
                                                     ----------------------------------------------------------------
                                                          2002          2001         2000         1999         1998(1)
                                                     ------------ ------------- ------------ ------------ -----------
                                                                   (In Thousands, Except Per Share Data)
Selected Operations Data:
------------------------
Total interest income ............................      $  6,152     $  6,575     $  6,171    $  6,192       $  6,744
Total interest expense ...........................         2,734        3,924        3,448       3,642          4,021
                                                        --------     --------     --------    --------       --------
  Net interest income ............................         3,418        2,651        2,723       2,550
                                                                                                                2,723
Provisions for losses on loans ...................           332          276           96         139             94
Net interest income after                               --------     --------     --------    --------       --------
  provision for losses on loans ..................         3,086        2,375        2,627       2,411          2,375
Noninterest income
  Fees, commissions and service charges ..........           694          595          470         497            448
  Gain (loss) on sale of securities, net .........           156            2         (234)     (2,038)          (167)
  Other noninterest income .......................            --           --           --           8             27
                                                        --------     --------     --------    --------       --------
Total noninterest income .........................           850          597          236      (1,533)           308

Total noninterest expense ........................         2,298        2,151        2,138       2,116          2,031
                                                        --------     --------     --------    --------       --------
Earnings (loss) before taxes on income ...........         1,637          821          725      (1,238)           906

Taxes on income ...................................          552          251          239        (466)           317
                                                        --------     --------     --------    --------       --------
Net earnings (loss) ..............................      $  1,085     $    570     $    486    $   (772)      $    589
                                                        ========     ========     ========    ========       ========


Basic earnings (loss) before common share ........      $   1.44     $   0.72     $   0.56    ($  0.90)      $   0.71
Diluted earnings (loss) per common share .........      $   1.42     $   0.71     $   0.56    ($  0.90)      $   0.69
Dividends per share ..............................      $   0.18     $   0.18     $   0.18    $   0.18       $   0.18

</TABLE>
________________________________________

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


                                       2
<PAGE>


<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                                  -------------------------------------------------------------------
                                                        2002         2001          2000          1999          1998
Selected Financial Condition Data:                ------------ --------------- ------------- ------------- ----------
---------------------------------
<S>                                                    <C>             <C>          <C>            <C>           <C>
Performance Ratios:
  Return on assets (ratio of net earnings (loss)
  to average total assets) ............................  1.22%          .66%          .58%         (.88%)          .67%
  Interest rate spread information:
  Average during year .................................  3.69          2.73          3.06          3.00           2.96
  End of year .........................................  4.10          3.03          2.86          3.03           3.05
  Net interest margin(1) ..............................  3.97          3.15          3.40          3.17           3.23
  Ratio of operating expense to average
  total assets ........................................  2.58          2.49          2.54          2.42           2.31
  Return on stockholders' equity (ratio of
  net earnings (loss) to average equity) .............. 12.16          6.82          5.95         (9.33)           .97
Efficiency ratio(2) ................................... 55.98         66.27         66.96         69.26          63.51

Asset Quality Ratios:
  Non-performing assets to total assets at
  end of year(3) ......................................  2.41           .61          1.39          1.36           1.02
  Allowance for losses on loans to non-performing
  loans(3) ............................................ 28.01         26.47         34.49         29.57          37.74
  Allowance for losses on loans to total
  loans ...............................................   .83           .56           .61           .61            .61

Other Ratios:
  Stockholder's equity to total assets at
  end of year ......................................... 10.63          9.45          9.95          9.48           9.44
  Average stockholders' equity to average assets ...... 10.04          9.68          9.71          9.46           9.61
  Average interest-earning assets to average
  interest-bearing liabilities ........................108.89%       108.98%       107.83%       103.79%        105.65%

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


                                       3
<PAGE>


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

General

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

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

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

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

     Local economic conditions in the Bank's market are not improving. Some area
employers are laying off employees and some are cutting  employees hours from 40
to 32 hours per week.  Currently,  farm prices for both grain and  livestock are
volatile  but  generally  better than at this time last year.  We are  currently
experiencing  decline in some  lines of retail  business.  In the event  current
economic and market conditions persist or worsen, loan demand and existing loans
may be  affected,  which could  adversely  affect the  financial  condition  and
results of operations of the Company and the Bank.

Forward-Looking Statement

     When used in this Annual  Report or future  filings by the Company with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive officer,  the words or phrases "will likely
result," "are  expected  to," "will  continue,"  "is  anticipated,"  "estimate,"
"project,"   "believe"   or  similar


                                       4
<PAGE>


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, 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.

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

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

     Stockholders'  equity  increased  $180,000,  or 2.2%,  during  fiscal 2001,
primarily  through a substantial  reduction in  unrealized  losses on securities
available  for sale of  $558,000  and the  retention  of net income as  retained
earnings increased $430,000, or 8.4%. The Company repurchased 111,500 shares,


                                       5
<PAGE>


or 12.9%,  of its common stock, at an average per share price of $7.32, or 65.1%
of book  value at June 30,  2001.  The  Company  paid  cash  dividends  totaling
approximately $139,000 or $.18 per share during fiscal 2001.

Results of Operations

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

     General.  Net earnings for the year ended June 30, 2002 increased $516,000,
or 90.6%,  to $1.1 million from $570,000 for the year ended June 30, 2001.  This
increase was  primarily  attributable  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 the  fiscal  year  ended  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 year 2002 compared to 9.68%
during fiscal year 2001.  The Company's  dividend  payout ratio was 12.5% during
fiscal 2002.

     Interest  Income.  Interest income was $6.2 million for the year ended June
30, 2002 and $6.6 million for the year ended June 30, 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 the year ended
June 30, 2001 compared to $65.1 million for the year ended June 30, 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 the year ended June 30, 2002 as compared to the year ended
June 30, 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 the year ended June 30,  2002  compared  to $3.9  million for the year ended
June 30, 2001. The decrease in interest expense was primarily due to a 172 basis
point decrease in the weighted  average rate paid on deposits  during the fiscal
year ended June 30, 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 year
ended June 30,  2002.  Contributing  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 the year ended June 30, 2002 compared to $547,000 for the
year  ended  June  30,  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


                                       6
<PAGE>


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 the year ended June 30,  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 and the Company's
vision for growth and variation in the  composition of its loan  portfolio,  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
the year ended June 30, 2002 from $597,000 for the year ended June 30, 2001. The
increase  was  primarily   attributable   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 the year ended June 30, 2002, from
$595,200 for the year ended June 30, 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 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 the
year ended June 30, 2002 from $251,600 for the same period in 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%.


                                       7
<PAGE>


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

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

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

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

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

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

     Provision  for  Losses on Loans.  The  provision  for  losses on loans is a
result of  management's  periodic  analysis  of the  adequacy  of the  Company's
allowance for losses on loans.  During the year ended June 30, 2001, the Company
recorded a  provision  for  losses on loans of  $276,000  compared  to a $96,000
provision  in fiscal  2000.  Additional  provisions  were  applied in the second
quarter of fiscal  2001 in


                                       8
<PAGE>


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

     As of June 30, 2001,  the Company's  non-performing  assets,  consisting of
non-accruing loans, accruing loans 90 days or more delinquent, real estate owned
and repossessed  consumer property,  totaled $1,443,000 or 1.61% of total assets
compared  to  $1,155,000  or 1.39%  of total  assets  as of June 30,  2000.  The
increase in  non-performing  assets related  primarily to a $295,000 increase in
non-accruing loans past-due 90 or more days and a $6,000 decrease in repossessed
consumer  property.  One-to-four  family  non-accruing  mortgage loans increased
$344,000 while all other classes of non-accruing loans decreased $49,000.

     Non-interest Income. Non-interest income increased $361,000 to $597,000 for
the year ended June 30, 2001 from $236,000 for the year ended June 30, 2000. The
increase  was  primarily   attributable   to  a  gain  on  sales  of  securities
available-for-sale  of $2,000 for fiscal  2001 as compared to losses of $234,000
on sales of securities  available-for-sale  in fiscal 2000.  Contributing to the
increase in non-interest  income was a 27% increase in fees, service charges and
commissions  of $125,000,  from  $470,000  for the year ended June 30, 2000,  to
$595,000 for the year ended June 30, 2001, as a result of an increased number of
fee-based accounts and enhanced fee collection efforts.

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

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


                                       9
<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,
                                 ---------------------------------------------------------------------------------------------------
                                                       2002                     2001                             2000
                                 ---------------------------------------------------------------------------------------------------
                                   Average    Interest            Average     Interest              Average     Interest
                                 Outstanding   Earned/  Yield/  Outstanding   Earned/    Yield/    Outstanding   Earned/    Yield/
                                   Balance      Paid     Rate     Balance      Paid      Rate       Balance       Paid       Rate
                                   -------      ----     ----     -------      ----      ----       -------       ----       ----

                                                                        (Dollars in Thousands)
<S>                                 <C>        <C>       <C>      <C>          <C>        <C>       <C>          <C>         <C>
Interest-Earning Assets:
 Loans receivable(1).............  $65,655    $5,340     8.13%   $64,985      $5,479      8.43%     $58,401      $4,852      8.31%
 Securities available-for-sale...   12,993       701     5.40     15,228         955      6.27       16,259       1,073      6.60
 Other interest-bearing assets...    6,894        95     1.38      3,360         101      3.01        4,349         176      4.05
 FHLB stock......................      489        16     3.27         34          39      6.15        1,087          70      6.44
                                    ------     -----              ------       -----                 ------       -----
  Total interest-earning assets(1)  86,031     6,152     7.15     84,207       6,574      7.81       80,096       6,171      7.70
                                    ------     -----              ------       -----                 ------       -----


Interest-Bearing Liabilities:
 Savings deposits................   29,036       720     2.48     23,124       1,027      4.44       23,441       1,055      4.50
 Money market deposits...........      363         5     1.38         9         2.56       433           10        2.31       352
 Demand and NOW deposits.........    9,819        96      .98       179         2.07     8,063          163        2.02     8,650
 Certificates of deposit.........   32,824     1,542     4.70     35,442       2,162      6.10       28,822       1,482      5.14
 FHLB Advances...................    6,966       371     5.33      9,699         547      5.64       13,522         738      5.46
                                    ------     -----              ------       -----                 ------       -----
Total interest-bearing liabilities  79,008     2,734     3.46     77,267       3,924      5.08       74,281       3,448      4.64
                                   -------     -----              ------       -----                -------       -----


Net interest income..............             $3,418                          $2,650                             $2,723
                                              ======                          ======                             ======

Net interest rate spread.........                        3.69%                            2.73%                              3.06%
                                                         ====                             ====                               ====

Net interest-earning assets......   $7,023                        $6,940                             $5,815
                                    ======                        ======                             ======

Net interest margin(2)...........                        3.97%                            3.15%                              3.40%
                                                         ====                             ====                               ====
Average interest-earning
assets to average
interest-bearing
liabilities .....................             108.89%                     108.98%                            107.83%
                                              ======                      ======                             ======
</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.


                                       10
<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,
                                          ----------------------------------------------------------------------------
                                                    2002  vs.  2001                        2001   vs.  2000
                                                    ---------------                        ----------------
                                                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.................         $(10)     $(130)         $(140)            $343           $285       $628
  Securities available-for-sale....         (226)       (28)          (254)              (6)          (112)      (118)
  Other interest-earning assets....            8        (14)            (6)             (54)           (21)       (75)
  FHLB Stock.......................            5        (28)           (23)             (15)           (16)       (31)
                                            ----       ----           ----            -----         ------       ----
     Total interest-earning assets.        $(223)     $(200)         $(423)            $268           $136       $404
                                           =====      =====          =====             ====           ====       ====

Interest-bearing liabilities:
  Savings deposits.................          874      (1181)          (307)               2            (30)       (28)
  Money market deposits............            1         (5)            (4)              (1)           ---         (1)
  Demand and NOW deposits..........           50       (133)           (83)              (1)            17         16
  Certificates of deposits.........         (255)      (365)          (620)             557            123        680
  FHLB advances....................         (174)        (2)          (176)           1,057         (1,248)      (191)
                                            ----       ----           ----            -----         ------       ----

     Total interest-bearing liabilities     $496    $(1,686)       $(1,190)          $1,614        $(1,138)      $476
                                           =====      =====          =====            =====         ======       ====
Net interest income................                                   $767                                       $(72)
                                                                     =====                                       ====
</TABLE>


                                       11
<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,
                                                                   ----------------------------------------
                                                                       2002           2001          2000
                                                                   ---------------------------------------
            <S>                                                     <C>              <C>           <C>
             Weighted average yield on:
               Loans receivable, net(1)....................            7.92%          8.49%         8.16%
               Securities available-for-sale...............            5.27           5.42          6.55
               Other interest-earning assets(2)............             .86           3.73          1.85
               FHLB stock..................................            3.00           4.56          6.86
                  Combined weighted average yield on
                  interest-earning assets..................            6.92           7.64          7.72

             Weighted average rate paid on:
               Savings deposits............................            1.99           3.69          4.60
               Money market deposits.......................             .97           2.28          2.41
               Demand and NOW deposits.....................             .71           1.57          1.98
               Certificates of Deposit.....................            4.06           5.81          5.63
               FHLB advances...............................            5.21           5.49          5.67
                  Combined weighted average rate paid
                  on interest-bearing liabilities..........            2.82           4.64          4.86
               Spread......................................            4.10%          3.00%         2.86%

</TABLE>

______________________________

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

(2)  FHLB demand account only other interest-earning assets on June 30, 2000.

Asset/Liability Management

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

     The Company's primary objective for its investment  portfolio is to provide
the liquidity  necessary to meet loan funding  needs.  This portfolio is used in
the ongoing management of changes to the Company's  assets/liability  mix, while
contributing  to  profitability  through  earnings flow.  The investment


                                       12
<PAGE>


policy  generally  calls for funds to be invested  among  various  categories of
security  types and  maturities  based upon the  Company's  need for  liquidity,
desire to achieve a proper  balance  between  minimizing  risk while  maximizing
yield,  the need to  provide  collateral  for  borrowings,  and to  fulfill  the
Company's asset/liability management goals.

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

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

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

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

     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, 2002, if the  regulation  applied to the bank.  However,
even if such deduction was applied,  the Bank would still meet their  risk-based
capital requirement under current regulatory guidelines.

     Presented below, as of June 30, 2002, is an analysis of the Bank's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve,  in 100 basis point  increments,  up 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

                                       13
<PAGE>


Bank's strong capital  position.  Management  reviews the OTS  measurements on a
quarterly  basis. At June 30, 2002, the Bank's interest rate risk was within the
Board's prescribed guidelines.


<TABLE>
<CAPTION>

                 Change in                  Board Limit            At June 30,
               Interest Rate             (min NPV ratios)             2002
              (Basis Points)                 % Change               % Change
         -------------------------    ----------------------    ----------------
<S>                 <C>                       <C>                      <C>

                     +300                      5.00%                   13.17%
                     +200                      6.00                    13.78
                     +100                      6.75                    14.15
                        0                      6.75                    14.41
                     -100                      6.75                    14.41

</TABLE>

     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  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 assured, 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 it 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

                                       14
<PAGE>


funds  beyond its  internal  ability to  generate  such funds it has  additional
borrowing  capacity  with the FHLB of Des Moines  and  collateral  eligible  for
repurchase agreements.

     The  Company  principally  uses its  liquidity  resources  to meet  ongoing
commitments,  to fund maturing  certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments,  to maintain liquidity,
and to meet other  operating  needs.  At June 30,  2002,  the  Company  had $1.1
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,
2002 totaled  $18.4  million or 62.7% 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,
2002,  the Company had  outstanding  borrowings of $5.6 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $19.2 million.

     The primary investing  activities of the Company include the origination of
loans and the purchase of  mortgage-backed  securities.  At June 30, 2002, these
assets accounted for over 84.4% 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, 2002,  the Bank had tangible and core capital of $7.2  million,
or 8.4% of adjusted total assets,  which was approximately $5.9 million and $3.8
million above the minimum requirements of 1.5% and 4.0%,  respectively.  At June
30, 2002, the Bank had total risk-based  capital of $7.7 million (including $7.2
million in core  capital),  or 14.0% of  risk-weighted  assets of $55.3 million.
This amount was $3.3 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

     In  July  2001,  the  Federal  Accounting  Standards  Board  (FASB)  issued
Statement No. 141,  Business  Combinations,  and Statement No. 142, Goodwill and
Other Intangible Assets.  Statement No. 141 requires that the purchase method of
accounting be used for all business  combinations  initiated after June 30, 2001
as well as all purchase  method business  combinations  completed after June 30,
2001.  Statement No. 141 also specifies criteria intangible assets acquired in a
purchase  method  business  combination  must meet to be recognized and reported
apart from goodwill,  noting that any purchase  price  allocable to an assembled
workforce may not be accounted for  separately.  Statement No. 142 requires

                                       15
<PAGE>


that goodwill and intangible  assets with  indefinite  useful lives no longer be
amortized,  but instead  tested for  impairment at least  annually in accordance
with the  provisions of Statement No. 142.  Statement No. 142 also requires that
intangible  assets with definite useful lives be amortized over their respective
estimated  useful lives to their  estimated  residual  values,  and reviewed for
impairment in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121,  Accounting for the Impairment of Long-Lived  Assets and for Long-Lived
Assets to Be Disposed Of.  Adoption of these new  accounting  standards have not
had a material effect on the consolidated financial statements.

     In June 2001, the FASB issued SFAS No. l43, Accounting for Asset Retirement
Obligations.  SFAS No. 143  requires  the Company to record the fair value of an
asset  retirement  obligation  as a liability in the period in which it incurs a
legal obligation  associated with the retirement of tangible  long-lived  assets
that result from the acquisition, construction, development and/or normal use of
assets. The Company also records a corresponding asset which is depreciated over
the life of the asset.  The Company is required to adopt SFAS No. 143 for fiscal
years  beginning after June 15, 2002. The Company does not expect this statement
to have a material effect on its consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived  Assets.  SFAS No. 144 supersedes SFAS No. 121 and the
accounting  and reporting  provision of APB Opinion No. 30 for the disposal of a
segment of a business. SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and requires that long-lived
assets be reviewed for impairment  whenever  events or changes in  circumstances
indicate  that  the  carrying  amount  of  an  asset  may  not  be  recoverable.
Recoverability  of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated  future cash
flows,  an  impairment  charge is recognized by the amount by which the carrying
amount of the asset  exceeds the fair value of the asset.  SFAS No. 144 requires
companies  to  separately  report  discontinued   operations  and  extends  that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment,  or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair value less costs to sell. The Company is required to adopt SFAS No. l44 for
fiscal years  beginning  after December 15, 2001. The adoption of this statement
will not have a material effect on the consolidated financial statements.

     SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical  Corrections,  was issued April 2002.  This
Statement  rescinds  FASB  Statement  No. 4,  Reporting  Gains and  Losses  from
Extinguishment  of Debt, and an amendment of that Statement,  FASB Statement No.
64,  Extinguishments  of Debt Made to Satisfy  Sinking-Fund  Requirements.  This
Statement also rescinds FASB Statement No. 44,  Accounting for Intangible Assets
of Motor Carriers.  This Statement amends FASB Statement 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  l3  shall be
effective for transactions occurring after May 15, 2002. All other provisions of
this Statement  shall be effective for financial  statements  issued on or after
May 15, 2002. The effects of implementation are 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


                                       16
<PAGE>


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.


                                       17
<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,
2002 and 2001, 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, 2002. 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, 2002 and 2001,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended June 30, 2002, in conformity with accounting  principles
generally accepted in the United States of America.



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



Des Moines, Iowa
July 26, 2002


<PAGE>

<TABLE>
<CAPTION>
                                         HORIZON FINANCIAL SERVICES
                                        CORPORATION AND SUBSIDIARIES

                                        Notes to Financial Statements

                                           June 30, 2002 and 2001


                                                                                2002                   2001
                                                                             ------------           ------------
<S>                                                                          <C>                       <C>
                                         Assets
Cash and cash equivalents                                                    $  8,124,566              5,591,526
Securities available-for-sale (note 2)                                         12,086,313             15,525,117
Loans receivable, net (notes 3 and 4)                                          65,098,795             65,445,714
Real estate (note 5)                                                              417,137                280,458
Stock in Federal Home Loan Bank, at cost                                          509,200                480,100
Office property and equipment, net (note 6)                                     1,351,486              1,253,741
Accrued interest receivable (note 7)                                              587,134                682,183
Deferred tax asset (note 10)                                                      211,800                 85,550
Prepaid expenses and other assets                                                  51,576                 71,499
                                                                             ------------           ------------
                   Total assets                                              $ 88,438,007             89,415,888
                                                                             ============           ============
                            Liabilities and Stockholders' Equity
Deposits (note 8)                                                            $ 71,953,695             69,871,926
Advances from Federal Home Loan Bank (note 9)                                   5,571,497              9,592,627
Advance payments by borrowers for taxes and insurance                             373,147                393,550
Accrued income taxes                                                              490,522                191,603
Accrued expenses and other liabilities                                            645,694                919,996
                                                                             ------------           ------------
                   Total liabilities                                           79,034,555             80,969,702
                                                                             ------------           ------------
Stockholders' equity:
     Preferred stock, $.01 par value; authorized 1500,000 shares;
         none issued                                                                   --                     --
     Common stock, $.01 par value; 1,500,000 shares authorized;
         1,046,198 shares issued                                                   10,462                 10,462
     Additional paid-in capital                                                 5,025,598              5,022,511
     Retained earnings, substantially restricted (note 10, 12, and 13)          6,515,330              5,565,793
     Treasury stock, at cost (293,016 and 294,736 shares in 2002
         and 2001, respectively)                                               (2,119,466)            (2,129,894)
     Accumulated other comprehensive loss - net
         unrealized loss on securities available-for-sale                         (28,472)               (22,686)
                                                                             ------------           ------------
                   Total stockholders' equity                                   9,403,452              8,446,186
Commitments and contingencies (notes 3 and 15)
                                                                             ------------           ------------
                   Total liabilities and stockholders' equity                $ 88,438,007             89,415,888
                                                                             ============           ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       20

<PAGE>

<TABLE>
<CAPTION>

                                        HORIZON FINANCIAL SERVICES
                                       CORPORATION AND SUBSIDIARIES
                                   Consolidated Statements of Operations
                                 Years ended June 30, 2002, 2001, and 2000


                                                                  2002                 2001               2000
                                                               -----------         -----------        -----------
<S>                                                            <C>                   <C>                <C>
Interest income:
     Loans                                                     $ 5,339,939           5,479,239          4,851,413
     Investment securities available-for-sale                      701,044             955,098          1,072,849
     Other interest income                                         110,511             140,300            246,441
                                                               -----------         -----------        -----------
                   Total interest income                         6,151,494           6,574,637          6,170,703
                                                               -----------         -----------        -----------
Interest expense:
     Deposits (note 8)                                           2,363,078           3,376,353          2,709,550
     Advance from Federal Home Loan Bank (note 9)                  370,855             547,170            738,089
                                                               -----------         -----------        -----------
                   Total interest expense                        2,733,933           3,923,523          3,447,639
                                                               -----------         -----------        -----------
                   Net interest income                           3,417,561           2,651,114          2,723,064

Provision for losses on loans (note 4)                             331,500             276,373             96,000
                                                               -----------         -----------        -----------
                   Net interest income after provision
                       for losses on loans                       3,086,061           2,374,741          2,627,064
                                                               -----------         -----------        -----------
Noninterest income:
     Fees, service charges, and commissions                        693,561             595,219            470,009
     Gain (loss) on sale of securities, net (note 2)               236,384               2,084           (233,976)
     Impairment loss on equity securities (note 2)                 (80,360)                 --                 --
                                                               -----------         -----------        -----------
                   Total noninterest income                        849,585             597,303            236,033
                                                               -----------         -----------        -----------
Noninterest expense:
     Compensation, payroll taxes, and employee
         benefits (note 11)                                      1,283,858           1,143,216          1,165,315
     Advertising                                                    81,339              75,286             97,440
     Office property and equipment                                 302,982             324,602            317,303
     Federal insurance premiums and special
         assessments (note 13)                                      23,771              32,719             41,431
     Data processing services                                      195,119             180,961            169,557
     Other real estate                                              36,159              19,658             21,232
     Other                                                         375,072             374,399            326,187
                                                               -----------         -----------        -----------
                   Total noninterest expense                     2,298,300           2,150,841          2,138,465
                                                               -----------         -----------        -----------
                   Earnings before taxes                         1,637,346             821,203            724,632
Taxes (note 10)                                                    551,900             251,600            239,100
                                                               -----------         -----------        -----------
                   Net earnings                                $ 1,085,446             569,603            485,532
                                                               ===========         ===========        ===========
Basic earnings per common share                                $      1.44                0.72               0.56
                                                               ===========         ===========        ===========
Diluted earnings per common share                              $      1.42                0.71               0.56
                                                               ===========         ===========        ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       21

<PAGE>

<TABLE>
<CAPTION>

                                         HORIZON FINANCIAL SERVICES
                                        CORPORATION AND SUBSIDIARIES
               Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
                                  Years ended June 30, 2002, 2001, and 2000



                                                                              Additional                            Unearned
                                                       Preferred   Common      paid-in    Retained     Treasury       ESOP
                                                         stock      stock      capital    earnings       stock       shares
                                                        -------  ----------  ----------  ----------   ----------   ----------
<S>                                                     <C>          <C>      <C>         <C>         <C>             <C>
Balance at June 30, 1999                                $    --      10,462   4,996,761   4,804,455   (1,229,571)     (65,503)
                                                        -------  ----------  ----------  ----------   ----------   ----------
Comprehensive income:
    Net earnings                                             --          --          --     485,532           --           --
    Unrealized losses on securities available-for-sale       --          --          --          --           --           --
    Less: reclassification adjustment for net realized
       losses included in net income, net of tax             --          --          --          --           --           --
                                                        -------  ----------  ----------  ----------   ----------   ----------
               Total comprehensive income                    --          --          --     485,532           --           --
                                                        -------  ----------  ----------  ----------   ----------   ----------
Dividends declared ($.18 per share)                          --          --          --    (154,351)          --           --
Treasury stock acquired                                      --          --          --          --      (84,626)          --
ESOP shares allocated                                        --          --          --          --           --       59,910
Stock appreciation of allocated ESOP shares                  --          --      23,600          --           --           --
                                                        -------  ----------  ----------  ----------   ----------   ----------
Balance at June 30, 2000                                     --      10,462   5,020,361   5,135,636   (1,314,197)      (5,593)
                                                        -------  ----------  ----------  ----------   ----------   ----------
Comprehensive income:
    Net earnings                                             --          --          --     569,603           --           --
    Unrealized gains on securities available-for-sale        --          --          --          --           --           --
    Less: reclassification adjustment for net realized
       gains included in net income, net of tax              --          --          --          --           --           --
                                                        -------  ----------  ----------  ----------   ----------   ----------
               Total comprehensive income                    --          --          --     569,603           --           --
                                                        -------  ----------  ----------  ----------   ----------   ----------
Dividends declared ($.18 per share)                          --          --          --    (139,446)          --           --
Treasury stock acquired                                      --          --          --          --     (815,697)          --
ESOP shares allocated                                        --          --          --          --           --        5,593
Stock appreciation of allocated ESOP shares                  --          --       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 ($.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)          --
                                                        =======  ==========  ==========  ==========   ==========   ==========
</TABLE>


<TABLE>
<CAPTION>

                                                               Net unrealized
                                                                  loss on
                                                                securities
                                                             available-for-sale       Total
                                                             ------------------    ----------
<S>                                                               <C>               <C>
Balance at June 30, 1999                                          (456,257)         8,060,347
                                                                ----------         ----------
Comprehensive income:
    Net earnings                                                        --            485,532
    Unrealized losses on securities available-for-sale            (331,269)          (331,269)
    Less: reclassification adjustment for net realized
       losses included in net income, net of tax                   206,864            206,864
                                                                ----------         ----------
               Total comprehensive income                         (124,405)           361,127
                                                                ----------         ----------
Dividends declared ($.18 per share)                                     --           (154,351)
Treasury stock acquired                                                 --            (84,626)
ESOP shares allocated                                                   --             59,910
Stock appreciation of allocated ESOP shares                             --             23,600
                                                                ----------         ----------
Balance at June 30, 2000                                          (580,662)         8,266,007
                                                                ----------         ----------
Comprehensive income:
    Net earnings                                                        --            569,603
    Unrealized gains on securities available-for-sale              559,283            559,283
    Less: reclassification adjustment for net realized
       gains included in net income, net of tax                     (1,307)            (1,307)
                                                                ----------         ----------
               Total comprehensive income                          557,976          1,127,579
                                                                ----------         ----------
Dividends declared ($.18 per share)                                     --           (139,446)
Treasury stock acquired                                                 --           (815,697)
ESOP shares allocated                                                   --              5,593
Stock appreciation of allocated ESOP shares                             --              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 ($.18 per share)                                     --           (135,264)
Stock options exercised                                                 --             12,870
                                                                ----------         ----------
Balance at June 30, 2002                                           (28,472)         9,403,452
                                                                ==========         ==========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       22

<PAGE>

<TABLE>
<CAPTION>

                                                  HORIZON FINANCIAL SERVICES
                                                 CORPORATION AND SUBSIDIARIES
                                             Consolidated Statements of Cash Flows
                                           Years ended June 30, 2002, 2001, and 2000



                                                                                2002            2001            2000
                                                                            ------------    ------------    ------------
<S>                                                                         <C>                  <C>             <C>
Cash flows from operating activities:
    Net earnings                                                            $  1,085,446         569,603         485,532
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Depreciation                                                           128,940         134,051         140,247
          Amortization of fees, premiums, and accretion of discounts, net         68,466          13,523         (36,793)
          Provision for losses on loans                                          331,500         276,373          96,000
          Loans originated for sale                                           (9,709,045)     (5,468,450)     (2,558,620)
          Proceeds on sales of loans                                          11,055,197       4,861,203       3,527,863
          Amortization of stock compensation plans                                    --           7,743          83,510
          Tax benefit from exercise of stock options                               3,087              --              --
          (Gain) loss on sale or disposal of securities                         (236,384)         (2,084)        233,976
          Impairment losses on securities                                         80,360              --              --
          Gain (loss) on sale of fixed assets                                        914          (3,687)             --
          Reinvested dividends                                                   (14,718)        (31,901)        (65,668)
          Decrease (increase) in accrued interest receivable                      95,049         (79,418)        (80,644)
          Increase (decrease) in accrued taxes payable and
             deferred taxes                                                      179,005         (47,346)        669,877
          Other, net                                                            (236,328)        462,563         122,283
                                                                            ------------    ------------    ------------
                Net cash provided by operating activities                      2,831,489         692,173       2,617,563
                                                                            ------------    ------------    ------------
Cash flows from investing activities:
    Securities available-for-sale:
       Purchases                                                              (8,224,359)     (5,072,406)     (4,215,094)
       Proceeds from sale                                                      7,771,215       4,651,188       1,232,520
       Proceeds from maturity and principal collected                          3,985,189       1,476,407       4,081,993
    Loans to customers, net                                                   (1,632,521)     (2,742,445)     (7,416,239)
    Proceeds from sale of real estate                                            143,971              --              --
    Purchases of real estate                                                          --              --              --
    Proceeds from sale of Federal Home Loan Bank stock                                --         222,400         500,000
    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                                  (227,599)       (346,184)       (101,015)
                                                                            ------------    ------------    ------------
                Net cash provided (used in) by investing activities            1,786,796      (1,799,140)     (5,917,835)
                                                                            ------------    ------------    ------------
Cash flows from financing activities:
    Increase in deposits                                                       2,081,769       5,110,702       5,184,992
    (Decrease) increase in advance payments by borrowers for
       taxes and insurance                                                       (20,403)        (17,005)         10,725
    Proceeds from advances from Federal Home Loan Bank                                --       3,500,000       1,000,000
    Principal payments on advances from Federal Home Loan Bank                (4,021,130)     (2,921,572)     (8,591,977)
    Payment of dividends                                                        (135,264)       (139,446)       (154,351)
    Exercise of stock options                                                      9,783              --              --
    Treasury stock acquired                                                           --        (815,697)        (84,626)
                                                                            ------------    ------------    ------------
                Net cash (used in) provided by financing activities           (2,085,245)      4,716,982      (2,635,237)
                                                                            ------------    ------------    ------------
                Net increase (decrease) in cash and cash equivalents           2,533,040       3,610,015      (5,935,509)

Cash and cash equivalents at beginning of year                                 5,591,526       1,981,511              --
                                                                            ------------    ------------    ------------
Cash and cash equivalents at end of year                                    $  8,124,566       5,591,526      (5,935,509)
                                                                            ============    ============    ============
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
       Interest                                                             $  3,046,638       3,623,104       3,344,069
       Taxes                                                                     372,810         298,947         185,082
    Noncash investing and financing activities:
       Transfers from loans to real estate                                       301,788          45,000              --
</TABLE>



See accompanying notes to consolidated financial statements.


                                       23
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



(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.

     (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 $7,188,000 and $5,018,000 at June
          30, 2002 and 2001, respectively.

                                                                     (Continued)
                                       24

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



     (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,  2002,  2001,
          and 2000 are shown in table below.

<TABLE>
<CAPTION>
                                                           2002          2001           2000
                                                        ----------    ----------     ----------
          <S>                                           <C>              <C>            <C>
          Net earnings (loss)                           $1,085,546       569,603        485,532
                                                        ----------    ----------     ----------
          Weighted average common shares outstanding       751,495       790,477        868,899
               Less unearned ESOP shares                        --          (236)        (7,487)
                                                        ----------    ----------     ----------
                             Weighted average common
                                 shares - basic            751,495       790,241        861,412
          Assumed incremental common shares issued
               upon exercise of stock options               13,657         6,782          9,045
                                                        ----------    ----------     ----------
                             Weighted average common
                                 shares - diluted       $  765,152       797,023        870,457
                                                        ==========    ==========     ==========
</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.

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

                                                                     (Continued)

                                       25

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000


     (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.


                                                                     (Continued)
                                       26

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



     (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.


                                       27

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



     (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  nonperforming  loans is  considered in assessing the credit
          risk inherent in the fair value estimate.

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

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


                                       28

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



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

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

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

     (p)  Effect of New Accounting Standards

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

          In June 2001,  the FASB  issued  SFAS No.  143,  Accounting  for Asset
          Retirement  Obligations.  SFAS No. 143  requires the Company to record
          the fair value of an asset retirement obligation as a liability in the
          period  in which  it  incurs a legal  obligation  associated  with the
          retirement  of  tangible   long-lived  assets  that  result  from  the
          acquisition,  construction,  development  and/or normal use of assets.
          The Company also records a  corresponding  asset which is  depreciated
          over the life of the asset.  The Company is required to adopt SFAS No.
          143 for fiscal years  beginning  after June 15, 2002. The Company does
          not  expect  this   statement  to  have  a  material   effect  on  its
          consolidated financial statements.

          In August  2001,  the FASB  issued SFAS No.  144,  Accounting  for the
          Impairment or Disposal of Long-Lived  Assets.  SFAS No. 144 supersedes
          SFAS No. 121 and the accounting and reporting provision of APB Opinion
          No. 30 for the  disposal  of a segment  of a  business.  SFAS No.  144
          addresses  financial  accounting  and reporting for the  impairment or
          disposal of long-lived  assets and requires that long-lived  assets be
          reviewed for impairment  whenever  events or changes in


                                       29

<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



          circumstances indicate that the carrying amount of an asset may not be
          recoverable.  Recoverability of assets to be held and used is measured
          by a comparison of the carrying  amount of an asset to future net cash
          flows expected to be generated by the asset. If the carrying amount of
          an asset exceeds its estimated future cash flows, an impairment charge
          is recognized by the amount by which the carrying  amount of the asset
          exceeds the fair value of the asset.  SFAS No. 144 requires  companies
          to  separately  report   discontinued   operations  and  extends  that
          reporting to a component of an entity that either has been disposed of
          (by  sale,  abandonment,  or  in  a  distribution  to  owners)  or  is
          classified as held-for-sale.  Assets to be disposed of are reported at
          the lower of the carrying amount or fair value less costs to sell. The
          Company is required to adopt SFAS No. 144 for fiscal  years  beginning
          after  December 15, 2001. The adoption of this statement will not have
          a material effect on the consolidated financial statements.

          SFAS  No.  145  Rescission  of FASB  Statements  No.  4,  44,  and 64,
          Amendment of FASB  Statement  No. 13, and  Technical  Corrections  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 effects of implementation are not anticipated to be 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.

     (q)  Reclassifications

          Certain  amounts in the June 30,  2001 and 2000  financial  statements
          have been reclassified to conform to the presentation used in the June
          30, 2002  financial  statements  and did not result in a change to net
          earnings or total stockholder's equity.

                                                                     (Continued)

                                       30

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



(2)  Securities Available-for-sale

     Securities available-for-sale at June 30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>

                                                                      Gross          Gross
                                                      Amortized     unrealized     unrealized       Fair
                    Description                         cost           gains         losses         value
     ---------------------------------------------   -----------    -----------    -----------    -----------
     <S>                                              <C>                <C>            <C>         <C>
     2002:
          Small Business Administration guaranteed
              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
                                                      ===========    ===========    ===========    ===========
     2001:
          FHLB bonds - due beyond one year,
              but within five years                   $ 1,000,000          4,500          8,344        996,156
          Small Business Administration guaranteed
              loan participation certificates             689,698          3,526             --        693,224
          Mortgage-backed and related securities:
              Mortgage-backed securities                7,923,204         68,853             --      7,992,057
              Collateralized mortgage obligations       4,108,569         19,908             --      4,128,477
          Mutual funds                                  1,222,718             --             --      1,222,718
          Equity securities                               612,934         13,030        134,739        491,225
                                                      -----------    -----------    -----------    -----------
                                                       15,557,123        109,817        143,083     15,523,857
          Stripped mortgage-backed securities:
              Principal only                                4,231             --          2,971          1,260
                                                      -----------    -----------    -----------    -----------
                                                      $15,561,354        109,817        146,054     15,525,117
                                                      ===========    ===========    ===========    ===========
</TABLE>


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

                                      2002          2001           2000
                                   ----------    ----------     ----------
          Proceeds                 $7,771,215     4,651,188     1,232,520
          Gross realized gains        250,141        66,373        84,857
          Gross realized losses        13,757        64,289       318,832


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


                                                                     (Continued)

                                       31
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000


(3)  Loans Receivable

     At June 30, 2002 and 2001, loans receivable consisted of the following:



                                                  2002           2001
                                              -----------    -----------
     Residential real estate loans:
          One-to-four family                  $38,294,960     40,716,220
          One-to-four family held-for-sale        258,346        798,530
          Multifamily                           1,362,607      1,458,223
          Construction                          1,474,881      1,380,661
                                              -----------    -----------
                                               41,390,794     44,353,634
     Commercial real estate loans               7,020,223      6,703,078
                                              -----------    -----------
                        Total real estate      48,411,017     51,056,712
                                              -----------    -----------
     Consumer loans:
          Automobile                            3,170,629      3,482,189
          Home improvement                        299,297        360,834
          Deposit accounts                        264,790        198,380
          Other                                 3,121,570      2,946,494
                                              -----------    -----------
                        Total consumer          6,856,286      6,987,897
                                              -----------    -----------
     Commercial business loans                 10,385,968      7,855,852
                                              -----------    -----------
                                               65,653,271     65,900,461
     Less:
          Deferred fees and discounts              17,243         85,433
          Allowance for losses on loans           537,233        369,314
                                              -----------    -----------
                                              $65,098,795     65,445,714
                                              ===========    ===========



     At June 30, 2002, the Bank had committed to originate  $1,051,050 of fixed-
     and  variable-rate  loans. In addition,  the Bank had customers with unused
     lines of credit totaling $2,648,846 at June 30, 2002.

     At June 30, 2002 and 2001, the Bank had nonaccrual  loans of $1,917,390 and
     $1,393,700,  respectively.  The  allowance  for losses on loans  related to
     these impaired loans was approximately $147,750 and $114,200, respectively.
     The average balances of such loans for the years ended June 30, 2002, 2001,
     and 2000, were $1,716,000,  $1,378,000, and $980,000, respectively. For the
     years ended June 30, 2002, 2001, and 2000, interest income which would have
     been  recorded  under the  original  terms of such loans was  approximately
     $198,000,  $170,000,  and  $144,000,   respectively,  and  interest  income
     actually recorded amounted to approximately $92,000,  $78,000, and $78,000,
     respectively.

                                                                     (Continued)

                                       32

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000




     Loan customers of the Bank include certain executive officers and directors
     and their related  interests and  associates.  All loans to this group were
     made in the ordinary course of business at prevailing terms and conditions.
     Changes in loans  outstanding  to executive  officers and directors for the
     years ended June 30, 2002 and 2001 were as follows:



                                                  2002          2001
                                                ---------     ---------
          Balance at beginning of year          $ 105,515        69,625
          Balance of newly appointed officer           --        50,241
          Repayments                              (57,713)      (14,351)
                                                ---------     ---------
          Balance at end of year                $  47,802       105,515
                                                =========     =========

(4)  Allowance for Losses on Loans

     Following is a summary of the  allowance  for losses on loans for the three
     years ended June 30, 2002:



                                             2002         2001          2000
                                           ---------    ---------    ---------
          Balance at beginning of year     $ 369,314      379,015      342,990
          Provision for losses on loans      331,500      276,373       96,000
          Charge-offs                       (164,223)    (290,083)     (62,296)
          Recoveries                             642        4,009        2,321
                                           ---------    ---------    ---------
          Balance at end of year           $ 537,233      369,314      379,015
                                           =========    =========    =========


(5)  Real Estate

     Following is a summary of real estate as of June 30, 2002 and 2001:


                                                        2002        2001
                                                      --------    --------
          Real estate acquired for investment         $210,787     235,458
          Real estate acquired through foreclosure     206,350      45,000
                                                      --------    --------
                                                      $417,137     280,458
                                                      ========    ========


     There were no  allowances  for losses on real  estate at June 30,  2002 and
     2001, respectively.

                                                                     (Continued)

                                       33

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000


(6)  Office Property and Equipment

     At June 30, 2002 and 2001, the cost and accumulated  depreciation of office
     property and equipment were as follows:


                                                   2002          2001
                                                ----------    ----------
          Land                                  $  216,595       216,595
          Office buildings                       1,483,776     1,477,972
          Furniture, fixtures, and equipment     1,058,320     1,007,785
          Automobile                                24,000        24,000
                                                ----------    ----------
                                                 2,782,691     2,726,352
          Less accumulated depreciation          1,431,205     1,472,611
                                                ----------    ----------
                                                $1,351,486     1,253,741
                                                ==========    ==========




(7)  Accrued Interest Receivable

     At June 30, 2002 and 2001,  accrued  interest  receivable  consisted of the
     following:

                                             2002        2001
                                           --------    --------
          Loans receivable                 $528,354     580,210
          Securities available-for-sale      58,780     101,973
                                           --------    --------
                                           $587,134     682,183
                                           ========    ========


(8)  Deposits

     Deposit  account  balances  at June 30,  2002 and  2001 are  summarized  as
     follows:
                                              2002          2001
                                          -----------    -----------
          Balance by account type:
               Savings                    $31,754,018     23,680,707
               Money market                   463,750        313,001
               Demand and NOW              10,363,591      8,679,036
               Certificates of deposit     29,372,336     37,199,182
                                          -----------    -----------
                                          $71,953,695     69,871,926
                                          ===========    ===========


     The aggregate amount of certificates of deposit with a minimum denomination
     of $100,000 was  approximately  $3,208,885  and $6,634,600 at June 30, 2002
     and 2001, respectively.


                                                                     (Continued)

                                       34

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



     At June 30, 2002,  scheduled  maturities of certificates of deposit were as
     follows:


     Years ended June 30:
           2003                                     $18,421,024
           2004                                       6,309,597
           2005                                         837,275
           2006                                         964,862
           2007 and thereafter                        2,839,578
                                                    -----------
                                                    $29,372,336
                                                    ===========

     Interest expense on deposits is summarized as follows:



                                          Years ending June 30,
                                  --------------------------------------
                                     2002          2001          2000
                                  ----------    ----------    ----------
      Savings                     $  720,012     1,026,751     1,055,175
      Money market                     5,037         8,538        10,359
      Demand and NOW                  95,824       179,401       162,401
      Certificates of deposit      1,542,205     2,161,663     1,481,615
                                  ----------    ----------    ----------
                                  $2,363,078     3,376,353     2,709,550
                                  ==========    ==========    ==========



     At June 30, 2002 and 2001,  accrued  interest  payable on deposits  totaled
     $340,433 and $626,893, respectively.

(9)  Advances from FHLB

        Advances from FHLB at June 30, 2002 and 2001, were as follows:



<TABLE>
<CAPTION>
                                                    2002                         2001
                                           -----------------------      -----------------------
                                                          Weighted                    Weighted
                                                          average                      average
                                              Amount       rates          Amount        rates
                                           -----------   ---------      -----------   ---------
     <S>                                   <C>               <C>        <C>              <C>
     Advance maturity:
          Within one year:
              Fixed                        $    26,382       5.50%      $ 4,023,105      5.81%
          Beyond one year, but within
              five years - Fixed             1,112,199       4.91         1,106,208      4.90
          Beyond five years, but within
              ten years - Fixed              4,379,734       5.19         4,370,136      5.19
          Beyond ten years, but within
              fifteen years - Fixed             53,182       5.50            93,178      5.50
                                           -----------                 ------------
                                           $ 5,571,497                  $ 9,592,627
                                           ===========                 ============
</TABLE>


                                                                     (Continued)

                                       35

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



     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.

(10) Taxes

     Taxes on income  (benefit)  for the years ended June 30,  2002,  2001,  and
     2000, were as follows:

<TABLE>
<CAPTION>
                                 2002                                      2001
                 -------------------------------------     -------------------------------------
                  Federal        State         Total        Federal        State        Total
                 ---------     ---------     ---------     ---------     ---------     ---------
     <S>         <C>              <C>          <C>           <C>            <C>          <C>
     Current     $ 579,900        95,000       674,900       239,600        49,000       288,600
     Deferred     (107,000)      (16,000)     (123,000)      (32,000)       (5,000)      (37,000)
                 ---------     ---------     ---------     ---------     ---------     ---------
                 $ 472,900        79,000       551,900       207,600        44,000       251,600
                 =========     =========     =========     =========     =========     =========
</TABLE>


                                                 2000
                                 -------------------------------------
                                  Federal        State         Total
                                 ---------     ---------     ---------
                                 $ 250,100        44,000       294,100
                                   (48,000)       (7,000)      (55,000)
                                 ---------     ---------     ---------
                                 $ 202,100        37,000       239,100
                                 =========     =========     =========


     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,
                                                   -----------------------------
                                                    2002       2001       2000
                                                   ------     ------     ------
     Federal income tax rate                         34.0%      34.0       34.0%
     Items affecting federal income tax rate:
          State tax, net of federal benefit           3.2        3.5        3.4
          Low income housing tax credits             (2.6)      (5.1)      (5.8)
          Other, net                                 (0.9)      (1.8)       1.4
                                                   ------     ------     ------
                                                     33.7%      30.6       33.0%
                                                   ======     ======     ======


                                                                     (Continued)

                                       36


<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



     The tax  effects of  temporary  differences  that give rise to  significant
     portions of the deferred tax assets and  deferred tax  liabilities  at June
     30, 2002 and 2001 are presented below:

<TABLE>
<CAPTION>
                                                                  2002        2001
                                                                --------    --------
     <S>                                                        <C>           <C>
     Deferred tax assets:
          Accrued expenses not deducted                         $ 83,000      67,000
          Unrealized losses on securities available-for-sale      16,850      13,600
          State net operating loss carryforwards                  12,000      13,000
          Allowance for losses on loans                          200,000     117,000
          Impairment on stock investments                         31,000          --
                                                                --------    --------
                        Total gross deferred tax assets          342,850     210,600
                                                                --------    --------
     Deferred tax liabilities:
          FHLB stock dividends                                    23,050      23,050
          Accrued interest receivable not taxed                    2,000       3,000
          Deferred loan fees                                      85,000      99,000
          Depreciation                                            21,000          --
                                                                --------    --------
                        Total gross deferred tax liabilities     131,050     125,050
                                                                --------    --------
                        Net deferred tax assets                 $211,800      85,550
                                                                ========    ========
</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,  2002 and  2001,  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,  2002 and 2001  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.

                                                                     (Continued)

                                       37

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



          The  following  table sets forth the plan's  funded status and amounts
          recognized in the consolidated  financial  statements at June 30, 2002
          and 2001:

<TABLE>
<CAPTION>
                                                                2002           2001
                                                            -----------     -----------
     <S>                                                    <C>               <C>
     Change in benefit obligation:
          Benefit obligation at beginning of year           $   927,784       1,016,486
          Service cost                                           57,617          57,446
          Interest cost                                          57,987          71,154
          Actuarial (gain)/loss                                (133,201)        (15,723)
          Benefits paid                                          (3,370)             --
          Other                                                 397,990        (201,579)
                                                            -----------     -----------
          Benefit obligation at end of year                 $ 1,304,807         927,784
                                                            ===========     ===========
     Change in plan assets:
          Fair value of plan assets at beginning of year    $   948,208       1,272,020
          Actual return on plan assets                          106,878        (122,233)
          Employer contributions                                     --              --
          Benefits paid                                          (3,370)             --
          Other                                                 397,990        (201,579)
                                                            -----------     -----------
          Fair value of plan assets and end of year         $ 1,449,706         948,208
                                                            ===========     ===========
     Reconciliation of funded status:
          Funded status (underfunded)/overfunded            $   144,899          20,424
          Unrecognized net actuarial (gain)/loss               (270,207)       (109,217)
          Unrecognized transition asset                          (7,838)         (9,285)
                                                            -----------     -----------
     Accrued benefit cost                                   $  (133,146)        (98,078)
                                                            ===========     ===========
</TABLE>


          The net periodic benefit cost for the years ended June 30, 2002, 2001,
          and 2000 includes the following components:

<TABLE>
<CAPTION>
                                                               Years ended June 30,
                                                       ----------------------------------
                                                         2002         2001         2000
                                                       --------     --------     --------
     <S>                                               <C>            <C>          <C>
     Service cost                                      $ 57,617       57,446       86,255
     Interest cost                                       57,987       71,154       79,839
     Expected return on plan assets                     (78,227)    (104,942)    (101,910)
     Recognized net actuarial gain                         (862)     (14,765)       1,378
     Amortization of transition (asset)/obligation       (1,447)      (1,761)      (1,761)
     Effect of special events                                --      (25,749)          --
                                                       --------     --------     --------
                        Net periodic (benefit) cost    $ 35,068      (18,617)      63,801
                                                       ========     ========     ========
</TABLE>




                                                                     (Continued)

                                       38


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000


<TABLE>
<CAPTION>
                                                              2002               2001
                                                          --------------    --------------
     <S>                                                  <C>                <C>
     Discount rate                                                 7.00%              6.25%
     Expected long-term rate of return                             7.75               8.25
     Weighted-average rate of compensation increase                5.16               5.13
     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, 2002 and 2001,  77,666 and 76,712 shares were
          allocated to the  participants  and zero and 954 shares were committed
          to be released, respectively. At June 30, 2002 and 2001, there were no
          unearned  shares.  ESOP  expense was $0,  $7,743,  and $83,513 for the
          years ended June 30, 2002, 2001, and 2000, respectively.

     (c)  Employment Agreements

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

     (d)  Stock Options

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

                                                                     (Continued)

                                       39

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



          Changes in options  outstanding and exercisable during 2002, 2001, and
          2000 were as follows:

                                                                       Weighted
                        Exercisable   Outstanding     Option price      average
                          options       options        per share         price
                         --------      --------       ------------     --------
     June 30, 1999         45,060        45,060       5.50 - 6.06         5.55
     Vested                    --            --
     Exercised                 --            --
                         --------      --------
     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
                         ========      ========

     (e)  Recognition and Retention Plan

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

(12) Stockholders' Equity

     (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.

                                                                     (Continued)

                                       40

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000



          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, 2002 and
          2001.

          The Bank's actual and required  capital  amounts and ratios as of June
          30, 2002 were as follows:


<TABLE>
<CAPTION>

                                                                                                     To be well
                                                                            For capital           capitalized under
                                                                             adequacy             prompt corrective
                                                       Actual                purposes             action provisions
                                                -------------------     -------------------      -------------------
                                                  Amount      Ratio       Amount      Ratio         Amount     Ratio
                                                ----------    -----     ----------    -----      ----------    -----
<S>                                             <C>            <C>      <C>            <C>       <C>
          Tangible capital
               (to tangible assets)             $7,239,000     8.38%    $1,727,500     2.00%     $       --      --%
          Leverage/equity (core) capital
               (to adjusted tangible assets)     7,239,000     8.38      3,455,000     4.00       4,318,750    5.00
          Tier I risk-based capital
               (to risk-weighted assets)         7,239,000    13.10      2,210,520     4.00       3,315,780    6.00
          Risk-based (total) capital
               (to risk-weighted assets)         7,725,000    13.98      4,421,040     8.00       5,526,300   10.00
</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.

(13) Supervisory Agreement

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

          o    Implementing  procedures  to improve  credit  administration  and
               documentation;

                                                                     (Continued)

                                       41

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000


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


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

(14) Fair Value of Financial Instruments

     The estimated fair values of the Company's financial instruments as of June
     30, 2002 and 2001 were as follows:

<TABLE>
<CAPTION>
                                                                   2002                        2001
                                                        --------------------------    --------------------------
                                                          Carrying        Fair         Carrying         Fair
                                                           value          value          value          value
                                                        -----------    -----------    -----------    -----------
     <S>                                                <C>              <C>            <C>            <C>
     Financial assets:
          Cash and cash equivalents                     $ 8,124,566      8,124,566      5,591,525      5,591,525
          Securities available-for-sale                  12,086,313     12,086,313     15,525,117     15,525,117
          Loans                                          65,098,795     67,147,492     65,445,714     68,517,214
          FHLB stock                                        509,200        509,200        480,100        480,100
          Accrued interest receivable                       587,134        587,134        682,183        682,183
     Financial liabilities:
          Deposits                                       71,953,695     72,391,893     69,871,926     70,280,198
          FHLB advances                                   5,571,497      5,782,251      9,592,627      9,583,905
          Advance payments by borrowers
              for taxes and insurance                       373,147        373,147        393,550        393,550
          Accrued interest payable                          340,433        340,433        653,138        653,138
                                                        ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                        Unrealized                   Unrealized
                                                          Notional        gains        Notional         gains
                                                            value       (losses)         value        (losses)
                                                        -----------    -----------    -----------    -----------
<S>                                                     <C>            <C>             <C>            <C>
     Off balance sheet assets:
          Commitments to extend credit                  $ 1,051,050             --      2,702,350             --
          Unused lines of credit                          2,648,846             --      2,764,700             --
                                                        ===========    ===========    ===========    ===========
</TABLE>

(15) Contingency

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

                                                                     (Continued)

                                       42

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2000


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

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

<TABLE>
<CAPTION>

                            Condensed Balance Sheets
                                                                         2002            2001
                                                                      -----------     -----------
     <S>                                                              <C>                 <C>
     Cash and cash equivalents                                        $   279,787         603,504
     Securities available-for-sale                                        670,954         491,225
     Loans receivable, net                                                905,419         759,912
     Investment in subsidiary                                           7,263,499       6,275,754
     Real estate                                                          210,787         235,458
     Interest receivable                                                   53,375          56,830
     Deferred tax asset                                                    74,500          58,450
                                                                      -----------     -----------
                        Total assets                                  $ 9,458,321       8,481,133
                                                                      ===========     ===========
     Total liabilities - accrued income taxes                         $    54,869          34,947
     Common stock                                                          10,462          10,462
     Additional paid-in capital                                         5,025,598       5,022,511
     Retained earnings                                                  6,515,330       5,565,793
     Treasury stock, at cost                                           (2,119,466)     (2,129,894)
     Accumulated other comprehensive income - net
          unrealized loss on securities available-for-sale                (28,472)        (22,686)
                                                                      -----------     -----------
                        Total stockholders' equity                      9,403,452       8,446,186
                                                                      -----------     -----------
                        Total liabilities and stockholders' equity    $ 9,458,321       8,481,133
                                                                      ===========     ===========
</TABLE>

<TABLE>
<CAPTION>

                       Condensed Statements of Operations


                                                       2002            2001            2000
                                                   -----------     -----------     -----------
     <S>                                           <C>                 <C>             <C>
     Interest income                               $   114,049         110,589         123,502
     Equity in earnings of subsidiaries              1,016,637         556,413         461,998
     Gain (loss) on sale of securities                 127,285         (31,817)         (3,113)
     Other expenses                                   (198,525)       (123,482)       (136,885)
                                                   -----------     -----------     -----------
                        Net earnings before tax      1,059,446         511,703         445,502
     Income tax benefit                                 26,000          57,900          40,000
                                                   -----------     -----------     -----------
                        Net earnings               $ 1,085,446         569,603         485,502
                                                   ===========     ===========     ===========
</TABLE>

                                                                     (Continued)

                                       43

<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2002 and 2001


<TABLE>
<CAPTION>

                       Condensed Statements of Cash Flows

                                                              2002            2001            2000
                                                          -----------     -----------     -----------
     <S>                                                  <C>                 <C>             <C>
     Operating activities:
          Net earnings                                    $ 1,085,446         569,603         485,532
          Equity in earnings of subsidiary                 (1,016,637)       (556,413)       (461,998)
          (Gain) loss on sale of securities                  (127,285)         31,817           3,113
          Tax benefit from exercise of stock option             3,087              --              --
          Other, net                                           28,674          17,810          55,461
                                                          -----------     -----------     -----------
                        Net cash (used in) provided by
                            operating activities              (26,715)         62,817          82,108
                                                          -----------     -----------     -----------
     Investing activities:
          Proceeds from sale of securities
              available-for-sale                            2,339,371         661,164         197,262
          Purchase of securities available-for-sale        (2,365,385)       (412,187)       (211,319)
          Loans receivable, net                              (145,507)        343,205          15,102
                                                          -----------     -----------     -----------
                        Net cash (used in) provided by
                            investing activities             (171,521)        592,182           1,045
                                                          -----------     -----------     -----------
     Financing activities:
          Dividends from subsidiary                                --         650,000              --
          Treasury stock acquired                                  --        (815,697)        (84,626)
          Exercise of stock options                             9,783              --              --
          Dividends paid                                     (135,264)       (139,446)       (154,351)
                                                          -----------     -----------     -----------
                        Net cash used in financing
                            activities                       (125,481)       (305,143)       (238,977)
                                                          -----------     -----------     -----------
                        Net (decrease) increase in
                            cash and cash equivalents        (323,717)        349,856        (155,824)

     Cash and cash equivalents at beginning of year           603,504         253,648         409,472
                                                          -----------     -----------     -----------
     Cash and cash equivalents at end of year             $   279,787         603,504         253,648
                                                          ===========     ===========     ===========
</TABLE>


                                       44

<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 24, 2002, 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 2002                                              FISCAL 2001
                    -------------------------------------                  ----------------------------------------
                        HIGH         LOW       DIVIDENDS                       HIGH         LOW         DIVIDENDS
                    -------------------------------------                  ----------------------------------------
<S>                    <C>         <C>            <C>       <C>                <C>        <C>            <C>
First Quarter          $8.010      $7.000         $.045     First Quarter      $8.000     $6.000         $.045
Second Quarter          7.870       7.020          .045     Second Quarter     7.250       5.780          .045
Third Quarter           9.500       7.800          .045     Third Quarter      6.250       6.063          .045
Fourth Quarter         10.850       9.000          .045     Fourth Quarter     8.010       6.250          .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 to the Notes to  Consolidated  Financial  Statements for a discussion of
restrictions on the Bank's ability to pay dividends.

At September 6, 2002,  there were 753,182 shares of Horizon  Financial  Services
Corporation   common  stock  issued  and  outstanding  and   approximately   130
stockholders of record.

STOCKHOLDERS AND GENERAL INQUIRIES            TRANSFER AGENT

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


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<PAGE>


                     HORIZON FINANCIAL SERVICES CORPORATION
                              CORPORATE INFORMATION

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

<TABLE>
<CAPTION>

<S>                                                                    <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 Executive                    Vice President of Horizon Financial Services
   Officer of Horizon Financial Services Corporation and                   Corporation and Horizon Federal Savings Bank
   Horizon Federal Savings Bank

Gary L. Rozenboom                                                      Norman P. Zimmerman
   Self-Employed Flooring Business                                         Retired Dentist and Former Mayor of the City of
   Oskaloosa, Iowa                                                         Oskaloosa
                                                                           Oskaloosa, 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
2500 Ruan Center                         216 South First Street                     1025 Thomas Jefferson Street, NW
Des Moines, IA  50309                    Oskaloosa, Iowa  52577                     East Lobby, Suite 700
                                                                                    Washington, DC  20007-5201

</TABLE>


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