UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                  For the fiscal year ended June 30, 1999
                                                               OR
[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from  _______________  to _________________


                         Commission file number 0-24036

                     HORIZON FINANCIAL SERVICES CORPORATION
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

             Delaware                                          42-1419757
(State or other jurisdiction of incorporation              (I.R.S. Employer
or organization)                                           Identification No.)

301 First Avenue East, Oskaloosa, Iowa                         52577-0008
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code:         (515) 673-8328
                                                     ---------------------------

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
                                (Title of class)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports)  and (2) has been subject to such filing  requirements  for the past 90
days. YES [X]   NO  [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item  405 of  Regulation  S-B  contained  herein,  and  no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         State  the  issuer's   revenues  for  its  most  recent   fiscal  year:
$4,659,289.
<PAGE>

         The aggregate  market value of the voting stock held by  non-affiliates
of the  Registrant,  computed by reference to the average of the closing bid and
asked price of such stock as reported on the Nasdaq  System as of September  15,
1999,  was $5.6 million.  (The exclusion from such amount of the market value of
the  shares  owned  by any  person  shall  not be  deemed  an  admission  by the
Registrant that such person is an affiliate of the Registrant.)

         As of September  15, 1999,  there were issued and  outstanding  875,062
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part II of Form 10-KSB - Annual Report to  Stockholders  for the fiscal
year ended June 30, 1999.

         Part III of Form  10-KSB - Proxy  Statement  for the Annual  Meeting of
Stockholders held in October 1999.

         Transitional Small Business Disclosure Format: YES [ ]; NO [ X ].
<PAGE>
                                     PART I

Item 1.  Description of Business

General

        The Company.  Horizon Financial Services Corporation (the "Company"),  a
Delaware corporation, was formed in March 1994 to act as the holding company for
Horizon Federal  Savings Bank ("Horizon  Federal" or the "Bank") upon the Bank's
conversion from the mutual to the stock form (the "Conversion"),  which occurred
on June 28, 1994.  On that date,  the Company  issued  506,017  shares of common
stock at a price of $10.00 per share in the  Conversion.  All  references to the
Company,  unless otherwise indicated, at or before June 28, 1994 are to the Bank
and its subsidiary on a consolidated basis. The Company's common stock trades on
the Nasdaq SmallCap Market under the Symbol "HZFS".

        At  June  30,  1999,  the  Company  had  $85.0  million  of  assets  and
stockholders' equity of $8.1 million (or 9.5% of total assets).

        The  executive  offices of the Company  are located at 301 First  Avenue
East,  Oskaloosa,  Iowa 52577, and its telephone number at that address is (515)
673-8328.

        Horizon  Federal.  Horizon  Federal,  a wholly owned  subsidiary  of the
Company, is a federally chartered stock savings bank headquartered in Oskaloosa,
Iowa. Its deposits are insured up to applicable  limits,  by the Federal Deposit
Insurance Corporation (the "FDIC"), which is backed by the full faith and credit
of the United  States.  Horizon  Federal's  primary  market area covers  Mahaska
County,  that portion of Marion  County in and around  Knoxville,  Iowa and to a
lesser extent,  Wapello County,  Iowa. The Bank services its market area through
its three full service offices, two of which are located in Oskaloosa,  Iowa and
one which is located in Knoxville, Iowa.

        The principal business of the Bank consists of attracting  deposits from
the general public and using such deposits,  together with  borrowings and other
funds, primarily to originate one- to four-family residential mortgage loans. To
a lesser extent, the Bank also originates  consumer loans,  commercial  business
loans,   multi-family   and  commercial   real  estate  loans  and   residential
construction  loans.  The Bank  also  invests  in  mortgage-backed  and  related
securities, as well as investment securities.  See "-- Originations of Loans and
Mortgage-Backed  Securities." At June 30, 1999,  substantially all of the Bank's
real estate mortgage loans (excluding  mortgage-backed  securities) were secured
by properties located in Iowa.

        The Bank's  revenues are derived  principally  from interest on mortgage
loans and securities, service fee income and dividends on Federal Home Loan Bank
("FHLB") stock. The Bank does not originate loans to fund leveraged  buyouts and
has no loans to non-United States corporations or foreign governments.

        The Bank currently  offers a variety of deposit  accounts  having a wide
range of  interest  rates and terms.  The  Bank's  deposits  include  commercial
demand, savings,  checking, money market and certificate accounts. The Bank only
solicits  deposits  in its  primary  market  area and does not  accept  brokered
deposits.

                                        1
<PAGE>
        Horizon Federal's operations are materially affected by general economic
conditions,  the monetary and fiscal policies of the federal  government and the
policies of the various regulatory  authorities,  including the Office of Thrift
Supervision  ("OTS") and the Board of  Governors of the Federal  Reserve  System
("Federal Reserve Board").

        During fiscal 1995, the Company  entered into a joint venture low income
apartment  housing  project to take advantage of certain tax benefits  available
under Section 42 of the Internal Revenue Code of 1986, as amended. The apartment
housing  project is composed of 62 units and is located in Des Moines,  Iowa. At
June 30, 1999,  the  apartment  complex was 100% leased.  At June 30, 1999,  the
Company's  equity  investment in the project was $173,000,  representing a 16.5%
limited  partnership  interest  in the  project.  The Company  will  receive tax
credits of approximately $42,000 per year through 2005.

        For  information  relating  to the  Company's  and the Bank's  year 2000
preparedness,  costs, risks and contingency plans, see the discussion  contained
under  "Management's  Discussion  and  Analysis and Related  Operations"  in the
Annual  Report to  Stockholders  attached  hereto  as  Exhibit  13 (the  "Annual
Report").

Forward-Looking Statements

        When used in this Annual Report on Form 10-KSB or future  filings by the
Company with the  Securities  and Exchange  Commission,  in the Company's  press
releases or other public or shareholder  communications,  or in oral  statements
made with the approval of an authorized  executive officer, the words or phrases
"will likely  result",  "are expected to", "will  continue",  "is  anticipated",
"estimate", "project", "believe" or similar expressions are intended to identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors--including regional
and national  economic  conditions,  changes in levels of market interest rates,
credit   risks  of  lending   activities,   and   competitive   and   regulatory
factors--could  affect the Company's  financial  performance and could cause the
Company's  actual  results for future  periods to differ  materially  from those
anticipated or projected.

        The  Company  does  not   undertake--and   specifically   disclaims  any
obligation--to publicly release the result of any revisions which may be made to
any  forward-looking  statements  to reflect the  occurrence of  anticipated  or
unanticipated events or circumstances after the date of such statements.

Market Area

        Horizon  Federal  primarily  serves  Mahaska  County and that portion of
Marion County in and around Knoxville,  Iowa. The Bank has three offices, two of
which are  located in  Oskaloosa,  Iowa and one which is  located in  Knoxville,
Iowa,  approximately  25 miles  west of  Oskaloosa.  The Bank  competes  in loan
originations  and in deposit  gathering  activities  with the  eleven  financial
institutions  and three credit unions  serving its primary market area. See " --
Competition."  The Bank estimates its share of the savings market in its primary
market area to be approximately 10%.

        Oskaloosa,  Iowa is located in Mahaska  County,  approximately  60 miles
southeast of Des Moines,  Iowa. Mahaska County has a population of approximately
22,000 people. Oskaloosa, with

                                        2

<PAGE>



a current population of approximately 10,500 persons, is the county seat and the
largest city in Mahaska County.  Oskaloosa has primarily an agricultural economy
and,  to a lesser  extent,  light  industrial  and retail  economies.  Its light
industrial economy,  however, is mainly agricultural support. Major employers in
the area include the Clow Valve Company, the Pella Corporation, Cargill, Vermeer
Manufacturing,  the V.A. Medical Center,  3-M Company,  William Penn College and
the Mahaska County Hospital.

        Some local economic  conditions in the Bank's market are weakening.  The
farm economy has been strong for over five years but is now beginning to soften.
As a result of an  over-supply  of grain,  which is anticipated to remain in the
local  economy  for an  extended  period  of time,  farm  prices  for  grain and
livestock,  which are currently depressed,  may continue to remain depressed and
possibly even drop further. A decrease in the prices of grain and livestock tend
to make  local  consumers  in our  market  area  reduce  spending,  which  might
adversely  affect  the local  economy.  In  addition,  the Bank is  experiencing
difficulty,  as are  most  businesses  in the  area,  in  hiring  and  retaining
experienced  personnel  as  labor  shortages  in the  area  continue  to  exist.
Management  believes that many of these  individuals  are seeking  employment in
major cities where economic conditions are stronger.

        These  economic   conditions  and  strong  competition  may  affect  the
financial  condition  and results of  operations of the Company and the Bank. In
the event current economic and market conditions persist or worsen,  loan demand
and existing  loans may be affected.  No  assurances  can be given that the Bank
will be able to maintain or increase its loan  portfolio,  which could adversely
affect the financial  condition and results of operations of the Company and the
Bank.

Lending Activities of the Bank

        General.   Historically,   the  Bank   originated   fixed-rate  one-  to
four-family  mortgage  loans.  Since  the  early  1980s,  however,  the Bank has
emphasized,  subject  to market  conditions,  the  origination  and  holding  in
portfolio of short- and intermediate-term  (one, three and five year) loans that
convert to annual  adjustable-rate  mortgage  ("ARM")  loans after their initial
period.  Management's  strategy has been to increase the percentage of assets in
its  portfolio  with  more  frequent   repricing   characteristics   or  shorter
maturities. During periods of low demand for one- to four-family loans, the Bank
may seek to invest in  mortgage-backed  and  related  securities.  The Bank also
originates for its loan portfolio  fixed-rate,  first lien mortgages for certain
budgeted  amounts.  The Bank also  originates and sells from time to time in the
secondary market 15 year and 30 year fixed-rate loans.

        The Bank primarily focuses its lending  activities on the origination of
loans  secured  by  first  mortgages  on  owner-occupied,  one-  to  four-family
residences.  To a  lesser  extent,  the Bank  also  originates  consumer  loans,
commercial  business loans,  commercial and  multi-family  real estate loans and
residential construction loans. See "- Originations of Loans and Mortgage-Backed
Securities."  At June 30,  1999,  the Bank's net loan  portfolio  totaled  $56.1
million.

        Several  loan  officers  of the Bank  and all  members  of the  Board of
Directors  serve as Loan  Committee  members on a rotating  basis.  At any given
time, the approval of at least one outside director and two other members of the
Loan  Committee  is required to approve  real estate  loans of $200,000 or more.
Loan Committee approval is currently required for unsecured and secured consumer
loans of more than $80,000 and $100,000, respectively, and unsecured and secured

                                        3

<PAGE>
commercial  business loans of more than $25,000 and $50,000,  respectively.  The
Board of Directors  must approve all  commercial  business  loans with a balance
exceeding $200,000.

        The  aggregate  amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower,  including related entities,
or the aggregate  amount that the Bank can invest in any one real estate project
is, with certain exceptions,  generally the greater of 15% of unimpaired capital
and  surplus or  $500,000.  See  "Regulation  -- Federal  Regulation  of Savings
Banks." At June 30,  1999,  the maximum  amount which the Bank could lend to any
one borrower and the borrower's  related  entities under the applicable  federal
regulations was approximately  $915,000,  however, at June 30, 1999 the Board of
Directors of the Bank had a self-imposed $800,000 general limitation.

        At June 30, 1999,  the Bank had one group of loans to related  borrowers
with outstanding balances in excess of the Board's self imposed limit but not in
excess of regulatory  limits.  The lending  relationships  totaled  $892,000 and
consisted of a $748,000  commercial line of credit,  four loans totaling $79,000
on commercial  real estate,  $43,000 on a single family  residence and a $22,000
commercial  loan. At June 30, 1999 all of the foregoing loans were performing in
accordance with their terms.

        The Bank reserves the right to change or discontinue lending programs to
respond to regulatory or competitive factors.

                                        4
<PAGE>
        Portfolio  Composition.  The following table presents the composition of
the  Bank's  loan  portfolio  in  dollar  amounts  and  in  percentages  (before
deductions for loans in process,  deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
                                                                                  At June 30,
                                            ---------------------------------------------------------------------------------------
                                                        1999                         1998                           1997
                                            ---------------------------------------------------------------------------------------
                                                Amount        Percent        Amount        Percent        Amount    Percent
                                            ---------------------------------------------------------------------------------------
                                                                              (Dollars in Thousands)
<S>                                              <C>          <C>           <C>           <C>          <C>            <C>
 Real Estate:
 One- to four-family.......................      $35,397       62.6%        $34,266        60.1%       $34,625         64.9%
 Commercial real estate....................        5,428        9.6           4,472         7.8          3,944          7.4
 Multi-family..............................        1,339        2.4           1,113         2.0            658          1.2
 Residential construction .................          152         .3           2,000         3.5            829          1.6
                                                 -------      -----         -------       -----       --------        -----
     Total real estate loans...............       42,316       74.9          41,851        73.4         40,056         75.1
                                                 -------      -----         -------       -----        -------        -----

Other Loans:
 Consumer Loans:
  Automobile...............................        3,990        7.1           3,841         6.7          4,051          7.6
  Home improvement.........................        1,047        1.8           3,150         5.5          2,353          4.4
  Deposit account..........................          149         .3             179          .3            222           .4
  Other....................................        2,099        3.7           2,320         4.1          1,541          2.9
                                                 -------      -----        --------       -----       --------        -----
     Total consumer loans..................        7,285       12.9           9,490        16.6          8,167         15.3
 Commercial business loans.................        6,872       12.2           5,682        10.0          5,124          9.6
                                                 -------      -----        --------       -----       --------        -----
     Total other loans.....................       14,157       25.1          15,172        26.6         13,291         24.9
                                                 -------      -----         -------       -----        -------        -----
     Total loans receivable, gross.........       56,473      100.0%         57,023       100.0%        53,347        100.0%
                                                              =====                       =====                       =====

Less:
 Loans in process..........................          ---                        598                        732
 Deferred fees and discounts...............           64                         81                         74
 Allowance for losses......................          343                        348                        348
                                                 -------                    -------                    -------
 Total loans receivable, net...............      $56,066                    $55,996                    $52,193
                                                 =======                    =======                    =======
</TABLE>

                                        5
<PAGE>
        The following  table shows the  composition of the Bank's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
                                                                                         At June 30,
                                                       -----------------------------------------------------------------------------
                                                                  1999                       1998                       1997
                                                       -----------------------------------------------------------------------------
                                                          Amount       Percent       Amount       Percent       Amount       Percent
                                                       -----------------------------------------------------------------------------
                                                                                    (Dollars in Thousands)
<S>                                                        <C>           <C>        <C>           <C>        <C>           <C>
Fixed Rate Loans:
 Real estate:
  One- to four-family ...............................      $ 6,875         12.1%    $ 5,125          9.0%    $ 4,627          8.7%
  Commercial real estate ............................        1,058          1.9       1,246          2.2       1,015          1.9
  Multi-family ......................................          680          1.2         573          1.0          87           .1
  Residential construction ..........................          152           .3         189           .3          --           --
                                                            ------        -----      ------        -----      ------        -----
     Total real estate loans ........................        8,765         15.5       7,133         12.5       5,729         10.7

  Consumer ..........................................        7,201         12.7       9,264         16.3       7,831         14.7
  Commercial business ...............................        6,536         11.6       5,550          9.7       4,839          9.1
                                                            ------        -----      ------        -----      ------        -----
     Total fixed-rate loans .........................       22,502         39.8      21,947         38.5      18,399         34.5
                                                            ------        -----      ------        -----      ------        -----

Adjustable Rate Loans:
 Real estate:
  One- to four-family ...............................       28,522         50.5      29,141         51.1      29,998         56.2
  Commercial real estate ............................        4,370          7.7       3,226          5.7       2,929          5.5
  Multi-family ......................................          659          1.2         540           .9         571          1.1
  Residential construction ..........................           --           --       1,811          3.2         829          1.6
                                                            ------        -----      ------        -----      ------        -----
     Total adjustable rate real estate loans.........       33,551         59.4      34,718         60.9      34,327         64.4

  Consumer ..........................................           84           .2         226           .4         336           .6
  Commercial business ...............................          336           .6         132           .2         285           .5
                                                            ------        -----      ------        -----      ------        -----
     Total adjustable rate loans ....................       33,971         60.2      35,076         61.5      34,948         65.5
                                                            ------        -----      ------        -----      ------        -----
     Total loans, receivable, gross .................       56,473        100.0%     57,023        100.0%     53,347        100.0%
                                                                          =====                    =====                    =====

Less:
 Loans in process....................................          ---                      598                      732
 Deferred fees and discounts.........................           64                       81                       74
 Allowance for loan losses...........................          343                      348                      348
                                                           -------                  -------                  -------
     Total loans receivable, net.....................      $56,066                  $55,996                  $52,193
                                                           =======                  =======                  =======
</TABLE>
                                                         6
<PAGE>
        The following  table  illustrates  the interest rate  sensitivity of the
Bank's loan  portfolio  at June 30, 1999.  Mortgages  which have  adjustable  or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The table does not reflect the effects of possible  prepayments
or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
                                         Real Estate
                             -------------------------------------
                                                    Residential                              Commercial
                                Mortgage(1)        Construction             Consumer          Business                 Total
                             ------------------  -----------------      ----------------  ------------------    --------------------
                                       Weighted           Weighted              Weighted            Weighted                Weighted
                                       Average            Average               Average             Average                 Average
                             Amount      Rate    Amount     Rate        Amount    Rate    Amount     Rate       Amount      Rate
                             ------      ----    ------     ----        ------    ----    ------     ----       ------      ----
                                                                      (Dollars in Thousands)
          Due During
         Years Ending
           June 30,
---------------------------
<S>                          <C>        <C>       <C>       <C>        <C>      <C>         <C>      <C>         <C>         <C>
2000(2)....................  $10,735    7.72%     $152      7.36%      $1,322   9.13%       $2,873   9.65%       $15,082     8.21%
2001 to 2004...............   20,021    7.57       ---      ---         4,760   9.37         3,288   8.45         28,069     7.98
2005 and following.........   11,408    8.19       ---      ---         1,203   9.21           711   9.10         13,322     8.33
                             -------              ----                 ------               ------               -------
   Total...................  $42,164    7.78      $152      7.36%      $7,285   9.30%       $6,872   9.02%       $56,473     8.12%
                             =======              ====                 ======               ======               =======
</TABLE>

(1)  Includes  one- to  four-family,  multi-family  and  commercial  real estate
     mortgage loans.

(2)  Includes demand loans and loans having no stated maturity.

                                        7
<PAGE>
         The  total  amount  of  loans  due  after  June  30,  2000  which  have
predetermined  interest rates is $18.0 million,  while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $23.4
million.

         One- to Four-Family  Residential  Mortgage  Lending.  Residential  loan
originations are generated by the Bank's marketing  efforts (which include radio
ads,  newspaper ads and direct  mail),  its present and walk-in  customers,  and
referrals  from real estate  brokers and builders.  The Bank focuses its lending
efforts  primarily on the  origination  of loans  secured by first  mortgages on
owner-occupied,   single-family   residences   in  its  market  area.   See  "--
Originations of Loan and Mortgage-Backed Securities."

         The Bank  currently  originates  ARM  loans  and,  to a lesser  extent,
fixed-rate  loans for  retention in the Bank's loan  portfolio.  During the year
ended June 30, 1999, the Bank originated $6.6 million of  adjustable-rate,  one-
to  four-family  real  estate  loans  and $7.4  million  of  fixed-rate  one- to
four-family loans (including  $220,000 of residential  construction  loans). The
Bank's one- to four-family  residential  mortgage  originations are primarily in
its market area.

         The Bank  currently  originates  adjustable-rate,  one- to  four-family
residential mortgage loans with a maximum term of 30 years. Fixed-rate loans for
portfolio are generally originated up to a maximum term of 30 years.  Fixed-rate
mortgage  loans  originated by the Bank in excess of 15 years are generally sold
in the secondary  market.  The Bank  originated $9.0 million of fixed rate loans
for sale during fiscal 1999.

         One- to four-family loan  originations are generally made in amounts of
up to 95% of the  appraised  value or selling  price of the  security  property,
whichever is less. For loans  originated  with  loan-to-value  ratios of greater
than 80%, the Bank typically  requires private mortgage  insurance to reduce the
Bank's  exposure to 80% of the appraised  value or selling price of the security
property.

         The Bank currently  offers one-year,  three-year and five-year  balloon
loans that convert into ARM loans with annual adjustment after the initial term.
Rates are  determined in accordance  with market and  competitive  factors.  The
Bank's ARM products generally carry interest rates which,  pursuant to the terms
of the note,  may be reset to a stated  margin  over the index  utilized  by the
Bank, which is currently the National Average Contract Rate for Previously Owned
Homes. The adjustable-rate  loans currently originated by the Bank provide for a
maximum 2% annual cap, and a maximum 6% lifetime  cap on the interest  rate over
the rate in effect on the date of  origination.  The annual and lifetime caps on
interest rate increases  reduce the extent to which these loans can help protect
the Bank  against  interest  rate  risk and may cause  these  loans not to be as
sensitive as the Bank's cost of funds.  The Bank's ARM loans are not convertible
into  fixed-rate  loans.  All of the Bank's  one- to  four-family  loans are not
assumable,  do not contain  prepayment  penalties  and do not  produce  negative
amortization.  Approximately  48.1% of the loans secured by one- to  four-family
real estate  originated  by the Bank during  fiscal  1999 were  originated  with
adjustable rates of interest.  See  "--Originations of Loans and Mortgage-Backed
Securities."

         At June 30, 1999, the Bank was not servicing any loans other than loans
it originated.  As of June 30, 1999, the Bank's  residential  ARM loan portfolio
totaled $28.5  million,  or 50.5% of the Bank's gross loan portfolio as compared
to the  residential  fixed-rate,  mortgage  loan  portfolio  which  totaled $6.9
million,  or 12.1% of the Bank's gross loan  portfolio.  ARM loans  decrease the
risk  associated  with  changes  in  interest  rates but  involve  other  risks,
primarily  because as interest  rates rise, the payment by the borrower may rise
to the extent permitted by the terms of the loan, thereby

                                        8
<PAGE>
increasing the potential for default.  At the same time, the market value of the
underlying property may be adversely affected by higher interest rates.

         In underwriting  residential real estate loans, the Bank evaluates both
the borrower's  ability to make monthly  payments,  employment  history,  credit
history and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the stated rate of the loan. Borrowers
on  adjustable-rate  loans are currently  qualified at a rate then in effect for
five-year  loans on one- to four-family  residential  property.  Typically,  the
spread  between a one-year ARM and a five-year  ARM has been 100 basis points or
more.  The Bank  generally  requires  that for  mortgage  loan  applications  an
appraisal of the security  property be performed by an independent fee appraiser
approved by the Bank. In connection with  origination of residential real estate
loans,  the Bank  generally  requires an opinion from an attorney  regarding the
title to the  property,  and fire and  casualty  insurance in an amount not less
than the amount of the loan.

         To supplement  loan demand in the Bank's  primary  market area the Bank
purchases  mortgage-backed  and  related  securities.  The Bank  purchased  $4.8
million,  $20.0  million  and  $12.0  million  of  mortgage-backed  and  related
securities during fiscal 1999, 1998 and 1997, respectively. See "-- Originations
of Loans and Mortgage-Backed Securities."

         Residential  Construction Lending. The Bank makes construction loans to
individuals for the  construction of their residences and, from time to time, to
established  builders and developers,  for the construction of residential homes
without an underlying sales contract.  At June 30, 1999, the Bank's construction
loan portfolio totaled $152,000, or .3% of its gross loan portfolio.  As of that
date substantially all of these loans were in the Company's primary market area.

         Construction  loans to individuals for their  residences are structured
to be converted to permanent  loans at the end of the  construction  phase which
typically runs from six months to one year. These  construction loans have rates
and terms which match one- to four-family loans then offered by the Bank, except
that during the construction  phase the borrower pays interest only. The maximum
loan-to-value  ratio of owner occupied single family  construction loans is 95%.
Residential  construction loans are generally  underwritten pursuant to the same
guidelines used for originating permanent one- to four-family residential loans.
The application process for construction loans includes a submission to the Bank
of the plans and costs of the project to be constructed. These items are used as
a basis to determine  the  appraised  value of the subject  property.  Loans are
based on the lesser of current appraised value or the cost of construction (land
plus building).

         The  uncertainties  inherent in estimating  construction  costs and the
market for a project upon completion  makes it relatively  difficult to evaluate
accurately  the total loan funds  required  to  complete a project,  the related
loan-to-value  ratios and the  likelihood  of ultimate  success of the  project.
Construction loans to borrowers other than  owner-occupants also involve many of
the same risks discussed  below regarding  commercial real estate loans and tend
to be more  sensitive to general  economic  conditions  than many other types of
loans.

         Multi-Family/Commercial Real Estate Lending. Horizon Federal also makes
real  estate  loans  secured by  multi-family  and  non-residential  properties.
Horizon  Federal's  multi-family  residential  loans are  primarily  secured  by
apartment  buildings  located within the Bank's market area. The commercial real
estate loans originated by the Bank are primarily  secured by office  buildings,
churches, storage facilities, and other income-producing properties. At June 30,
1999, $1.3 million,

                                        9
<PAGE>
or 2.4%, of the Bank's gross loan portfolio  consisted of multi-family loans and
$5.4  million,  or  9.6%,  of the  Bank's  gross  loan  portfolio  consisted  of
commercial real estate loans.

         Commercial real estate lending entails significant  additional risks as
compared  with  residential  property  lending.  Commercial  real  estate  loans
typically  involve large loan balances to single  borrowers or groups of related
borrowers.  The payment  experience on such loans is typically  dependent on the
successful  operation of the real estate project and as such may be subject to a
greater  extent  than  residential  loans to adverse  conditions  in the economy
generally.  In dealing with these risk factors, the Bank generally limits itself
to a real  estate  market  and/or  borrowers  with  which it has  knowledge  and
experience.

         Appraisals on properties  securing  multi-family  and  commercial  real
estate property loans originated by the Bank are performed by an independent fee
appraiser  approved by the Bank at the time the loan is made.  All appraisals on
multi-family  and  commercial  real  estate  loans are  reviewed  by the  Bank's
management.  In addition,  the Bank's underwriting  procedures generally require
verification of the borrower's credit history,  income and financial statements,
banking  relationships and income projections for the property. In recent years,
personal   guarantees  have  been  obtained  for  all  or  most  of  the  Bank's
multi-family  and  commercial  real estate  loans.  While the Bank  continues to
monitor  multi-family  and commercial real estate loans on a regular basis after
origination,  updated  appraisals are not normally obtained after closing unless
the Bank believes  that there are questions  regarding the status of the loan or
the value of the collateral.

         At June 30,  1999,  the Bank had no  multi-family  or  commercial  real
estate  loans to one  borrower,  or group of  borrowers,  which had an  existing
carrying  value in  excess  of  $600,000.  At such  date the Bank had only  five
commercial and  multi-family  real estate loans which exceeded  $300,000 at June
30, 1999, all of which were performing in accordance with their repayment terms.

         Multi-family  and commercial  real estate  lending  affords the Bank an
opportunity to receive  interest at rates higher than those generally  available
to one- to four-family residential lending. Nevertheless,  loans secured by such
properties  are generally  larger and involve a greater degree of risk than one-
to four-family  residential mortgage loans. Because payments on loans secured by
multi-family  and commercial  real estate  properties are often dependent on the
successful  operation or management of the  properties,  repayment of such loans
may be subject to adverse  conditions  in the real estate market or the economy.
If the cash flow from the  project is reduced  (for  example,  if leases are not
obtained or renewed),  the borrower's ability to repay the loan may be impaired.
Horizon Federal's current lending guidelines  generally require,  in the case of
loans secured by multi-family or commercial  income-producing property, that the
property  securing  such loans  generate  net cash flow of 125% of debt  service
after  payment  of  all  operating  expenses,  excluding  depreciation,   and  a
loan-to-value ratio of no more than 75%.

         Consumer  Lending.  Management  believes  that  offering  consumer loan
products  helps  reinforce  and expand the Bank's  customer  base.  In addition,
because   consumer  loans  generally  have  shorter  terms  to  maturity  and/or
adjustable rates and carry higher rates of interest than do residential mortgage
loans,  they can be useful  asset/liability  management tools. See "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Asset/Liability  Management" in the Annual Report. The Bank currently originates
substantially  all of its consumer loans in its primary market area. At June 30,
1999,  the Bank's  consumer  loans totaled $7.3 million,  or 12.9% of the Bank's
gross loan portfolio.

                                       10
<PAGE>
         Horizon Federal offers a variety of consumer loans for various purposes
with terms up to 15 years.  The  majority  of lending is for  automobiles,  home
improvement and other personal purposes.  The Bank originates  consumer loans on
both a direct and an indirect basis. Direct loans are made when the Bank extends
credit  directly to the  borrower.  Indirect  loans are  obtained  when the Bank
purchases loan contracts from retailers of goods or services which have extended
credit to their customers. Horizon Federal began its indirect lending program in
January 1993 with  selected  automobile  dealers  located in the Bank's  lending
area. At June 30, 1999, the  outstanding  balances on automobile  loans and home
improvement  totaled  $4.0 million and $1.0  million,  or 54.8% and 14.4% of the
Bank's gross consumer loan portfolio, respectively.

         In addition,  Horizon  Federal  commenced  offering Visa and MasterCard
credit cards in April 1994. Both types of lending  generally present more credit
risk to the Bank than one- to four-family residential lending. At June 30, 1999,
the Bank had $23,000 of credit  card loans  outstanding  and  $178,000 of unused
credit available under its credit card program.

         The  underwriting  standards  employed by the Bank for  consumer  loans
include a determination of the applicant's payment history on other debts and an
assessment  of the  ability to meet  existing  obligations  and  payments on the
proposed  loan.  Although   creditworthiness  of  the  applicant  is  a  primary
consideration,  the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.

         Consumer  loans may entail  greater risk than do  residential  mortgage
loans,  particularly  in the case of consumer loans which are unsecured,  or are
secured by rapidly  depreciable  assets such as automobiles.  In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the  outstanding  loan balance as a result of the greater
likelihood  of  damage,  loss  or  depreciation.   In  addition,  consumer  loan
collections are dependent on the borrower's  continuing  financial stability and
thus  are  more  likely  to  be  affected  by  adverse  personal  circumstances.
Furthermore,  the  application  of various  federal  and state  laws,  including
bankruptcy and  insolvency  laws, may limit the amount which can be recovered on
such loans. At June 30, 1999, non-performing consumer loans totaled $186,000, or
2.6% of total  consumer  loans and .3% of the Bank's gross loan  portfolio.  See
"Asset Quality - Non-Performing Assets."

         Commercial  Business  Lending.  The  Bank  also  originates  commercial
business loans.  The Bank offers  commercial  business loans to service existing
customers, to consolidate its banking relationships with these customers, and to
further its  asset/liability  management  goals.  Most of the Bank's  commercial
business  loans have been  extended  to finance  local  businesses  and  include
short-term  loans to finance  machinery and equipment  purchases,  inventory and
accounts  receivable.  Commercial  loans also involve the extension of revolving
credit for a  combination  of  equipment  acquisitions  and  working  capital in
expanding companies.

         The maximum term for loans extended on machinery and equipment is based
on the projected  useful life of such  machinery and equipment.  Generally,  the
maximum  term on  non-mortgage  lines of credit is one year.  The  loan-to-value
ratio on such loans may not exceed 75% of the value of the  collateral  securing
the loan.

         The two largest commercial  business loans outstanding at June 30, 1999
were a  $753,000  business  line of credit to a builder  of one- to  four-family
residential  properties  and a  $748,000  business  line  of  credit  to a local
trucking  firm.  At June 30,  1999,  these  lines of credit were  performing  in
accordance with their repayment terms. The Bank had only four other commercial

                                       11
<PAGE>
business  loans in  excess  of  $250,000  at June 30,  1999,  all of which  were
performing in accordance with their repayment terms at such date.

         Unlike  residential  mortgage  loans,  which  generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other  income,  and which are secured by real  property  whose value tends to be
more  easily  ascertainable,  commercial  business  loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be dependent upon the success
of the business  itself.  The Bank's  commercial  business  loans almost  always
include personal guarantees and are usually, but not always, secured by business
assets, such as accounts  receivable,  equipment and inventory,  as well as real
estate. However, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may  fluctuate in value based on the success of the
business.

         The Bank  recognizes the generally  increased  credit risks  associated
with commercial business lending.  Horizon Federal's commercial business lending
policy  emphasizes  credit file  documentation  and  analysis of the  borrower's
character, management capabilities,  capacity to repay the loan, the adequacy of
the borrower's capital and collateral.  Analysis of the borrower's past, present
and future cash flows is also an important  aspect of Horizon  Federal's  credit
analysis.

Originations of Loans and Mortgage-Backed Securities

         The Bank originates real estate loans through  marketing  efforts,  the
Bank's customer base,  walk-in customers and referrals from real estate brokers.
The Bank originates both  adjustable-rate  and fixed-rate  loans. Its ability to
originate  loans is dependent  upon the relative  demand for  fixed-rate  or ARM
loans in the  origination  market,  which  is  affected  by the  term  structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition.  During the years ended
June 30, 1999 and 1998, the Bank's dollar volume of adjustable-rate  real estate
loan  originations  and the dollar  volume of the same type of  fixed-rate  loan
originations  were  approximately  the same and for the year ended June 30, 1997
adjustable-rate  real estate loans exceeded the dollar volume of fixed rate loan
originations.

         The Bank does not generally purchase loans or loan  participations.  In
times of low levels of loan  demand,  the Bank has  invested its excess funds in
mortgage-backed  and related  securities.  During fiscal 1999, 1998 and 1997 the
Bank  purchased  $4.8,  $20.2  million  and  $12.0  million,   respectively,  of
mortgage-backed  and  related  securities.  The Bank  funded  its  purchases  of
mortgage-backed and related  securities,  specifically  collateralized  mortgage
obligations, during fiscal 1999, primarily with sales and repayments of mortgage
loans and mortgage-backed and related securities.  See "Management's  Discussion
and Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management"  in  the  Annual   Report.   The  Bank  decreased  its  holdings  of
collaterized  mortgage  obligations ("CMOs") during the fiscal year by primarily
selling CMOs that would increase the Bank's interest rate risk. This decrease of
the CMO  portfolio  resulted  in placing  interest  rate risk within the Board's
policy  guidelines by June 30, 1999.  Pursuant to an agreement with the OTS, the
Bank intends to maintain a moderate  interest  rate risk  position for its total
portfolio. See "Regulation -- Supervisory Agreement."

                                       12
<PAGE>
         The following table shows the loan origination,  purchase and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                             --------------------------------------
                                                1999          1998           1997
                                             --------       --------       --------
                                                     (Dollars in Thousands)
<S>                                          <C>            <C>            <C>
Originations by type:
 Adjustable rate:
  Real estate
   - one- to four-family ..............      $  6,637       $ 11,089       $  5,153
   - multi-family .....................           140             49           --
   - commercial real estate ...........         1,415            719            664
   - residential construction .........          --            1,686          1,154
  Non-real estate
   - consumer .........................            35             21            102
   - commercial business ..............           125           --             --
                                             --------       --------       --------
         Total adjustable-rate ........         8,352         13,564          7,073
                                             --------       --------       --------

 Fixed rate:
  Real estate
   - one- to four-family ..............         7,148          7,362          1,650
   - multi-family .....................           596           --               23
   - commercial real estate ...........           265          5,081            362
   - residential construction .........           220            951            212
  Non-real estate
   - consumer .........................         6,099         10,698          5,676
   - commercial business ..............         2,714          1,942          1,356
                                             --------       --------       --------
         Total fixed-rate .............        17,042         26,034          9,279
                                             --------       --------       --------
         Total loans originated .......        25,394         39,598         16,352

Total loan purchases ..................            60           --             --
Total loan sales ......................        (8,613)        (6,077)          (602)
Total loan repayments .................       (21,118)       (29,526)       (13,473)
Increase (decrease) in other items, net         4,347           (192)           812
                                             --------       --------       --------
         Net increase .................      $     70       $  3,803       $  3,089
                                             ========       ========       ========
</TABLE>

                                       13
<PAGE>
         The following table shows the purchase,  sale and repayment  activities
of the Bank's mortgage-backed and related securities for the periods indicated.
<TABLE>
<CAPTION>
                                                        Year Ended June 30,
                                               --------------------------------------
                                                  1999          1998           1997
                                               --------       --------       --------
                                                       (Dollars in Thousands)
<S>                                            <C>            <C>            <C>
Purchases:
  Mortgage-backed and related securities       $  1,213       $   --         $   --
  CMOs ..................................         3,565         20,236         12,259
                                               --------       --------       --------
         Total ..........................         4,778         20,236       $ 12,259
                                               --------       --------       --------

Sales:
  Mortgage-backed and related securities           --           (2,209)        (3,148)
  CMOs ..................................        (4,894)       (15,617)          (979)
                                               --------       --------       --------
         Total ..........................        (4,894)       (17,826)        (4,127)
                                               --------       --------       --------

Repayments:
  Mortgage-backed and related securities           (110)          (126)          (744)
  CMOs ..................................        (5,262)        (3,806)          (837)
  Net Amortization MBS and CMOs .........            18            421            (12)
  Decrease in other items, net ..........          (795)        (1,676)           (55)
                                               --------       --------       --------
         Net increase (decrease) ........      $ (6,265)      $ (2,777)      $  6,592
                                               ========       ========       ========
</TABLE>

Asset Quality

         General.  When a borrower  fails to make a required  payment on a loan,
the Bank  attempts  to cause  the  delinquency  to be  cured by  contacting  the
borrower.  In the case of loans secured by real estate, a late notice is sent by
the 11th of the month if payment  for the prior  month is not  received.  If the
delinquency  is not cured by the 15th of the month,  an  attempt to contact  the
borrower is made by telephone.  Additional  written and verbal contacts are made
with the borrower to the extent necessary, and if required a personal visit by a
loan  officer  of the Bank is  arranged.  If the  delinquency  is not cured or a
payment plan arranged by the 61st day of delinquency or shortly thereafter,  the
matter is  generally  referred  to the Bank's  collection  manager and action to
foreclose on the property is initiated.  After 90 days of delinquency,  interest
income  on loans is  reduced  by the full  amount  of  accrued  and  uncollected
interest.  If  foreclosed,  the property is sold at a sheriff's  sale and may be
purchased  by the  Bank.  Delinquent  consumer  loans are  handled  in a similar
manner.  The Bank's procedures for repossession and sale of consumer  collateral
are subject to various requirements under Iowa consumer protection laws.

         Real estate  acquired by Horizon  Federal as a result of foreclosure or
by deed in lieu of  foreclosure  is  classified as real estate owned until it is
sold.  When  property  is  acquired,  it is  recorded  at the  lower  of cost or
estimated fair value at the date of  acquisition,  and any write-down  resulting
therefrom is charged to the  allowance for losses on loans.  After  acquisition,
all costs  incurred in  maintaining  the property are expensed.  However,  costs
relating to the  development  and improvement of the property are capitalized to
the extent of net realizable value.

                                       14
<PAGE>
         The following table sets forth the Bank's loan  delinquencies  by type,
by amount and by percentage of category at June 30, 1999. The amounts  presented
represent the total remaining  principal balances of the loans,  rather than the
actual payment amounts which are overdue.
<TABLE>
<CAPTION>
                                                                           Loans Delinquent For:
                                ----------------------------------------------------------------------------------------------------
                                            30-59 Days                          60-89 Days                      90 Days and Over
                                ----------------------------------------------------------------------------------------------------
                                                  Percent of                         Percent of                         Percent of
                                                     Loan                               Loan                  Amount       Loan
                                  Number  Amount   Category      Number   Amount      Category      Number    Amount     Category
                                  ------  ------   --------      ------   ------      --------      ------   ----------  --------
                                                                         (Dollars in Thousands)
<S>                                 <C>   <C>        <C>          <C>       <C>          <C>         <C>      <C>          <C>
Real Estate:
One- to four-family............     14    $  680     1.9%          6        $127          .4%         22      $   755       2.1%

Multi-family...................     --        --      --          --          --          --          --           --        --

Commercial real estate.........      3       149     2.8           1          20          .4           1          116       2.1

Consumer.......................     24       237     3.3          10          46          .6          29          186       2.5

Commercial business............      2         7      .1           1          72         1.0           4          103       1.5
                                   ---    ------                 ---        ----                     ---       ------

     Total.....................     43    $1,073     1.9%         18        $265          .5%         56       $1,160       2.1%
                                   ===    ======                 ===        ====                     ===       ======
<CAPTION>
                                      Loans Delinquent For:
                                ---------------------------------
                                             Total
                                ---------------------------------
                                                      Percent of
                                                         Loan
                                 Number     Amount     Category
                                ----------  ------    ----------
                                    (Dollars in Thousands)
<S>                               <C>      <C>          <C>
Real Estate:
One- to four-family............     42      $1,562       4.4%

Multi-family...................     --          --        --

Commercial real estate.........      5         285       5.3

Consumer.......................     63         469       6.4

Commercial business............      7         182       2.6
                                   ---      ------

     Total.....................    117      $2,498       4.4%
                                   ===      ======

</TABLE>

                                       15
<PAGE>
         Non-Performing  Assets.  The table  below  sets forth the  amounts  and
categories  of  non-performing  assets in the Bank's loan  portfolio.  Loans are
placed on non-accrual  status when the collection of principal  and/or  interest
becomes  doubtful.  As a matter of policy,  the Bank does not  generally  accrue
interest on loans past due 90 days or more. For all periods presented,  the Bank
has had no troubled debt  restructurings  (which involve  forgiving a portion of
interest or  principal on any loans or making  loans at a rate  materially  less
than that of  market  rates).  Foreclosed  assets  include  assets  acquired  in
settlement of loans. There were no loans deemed to be in-substance foreclosed at
June 30, 1999.
<TABLE>
<CAPTION>
                                                          At June 30,
                                               --------------------------------
                                                1999         1998         1997
                                               ------       ------       ------
                                                   (Dollars in Thousands)
<S>                                            <C>          <C>          <C>
Non-accruing loans:
  One- to four-family ...................      $  755       $  691       $  318
  Commercial real estate ................         116         --              9
  Consumer ..............................         186          180          130
  Commercial business ...................         103           51           12
                                               ------       ------       ------
     Total ..............................       1,160          922          469
                                               ------       ------       ------
Accruing loans 90 days or more:
  One- to four-family ...................        --           --             92
  Commercial ............................        --           --            128
                                               ------       ------       ------
      Total .............................        --           --            220
                                               ------       ------       ------
Foreclosed assets:
  One- to four-family ...................        --           --            137
  Commercial real estate ................        --           --            206
  Consumer ..............................        --           --             13
                                               ------       ------       ------
     Total ..............................        --           --            356
                                               ------       ------       ------

Total non-performing assets .............      $1,160       $  922       $1,045
                                               ======       ======       ======
Total as a percentage of total  assets ..        1.36%        1.02%        1.22%
                                               ======       ======       ======
</TABLE>

         For the fiscal year ended June 30, 1999,  gross  interest  income which
would have been recorded had the  non-accruing  loans been current in accordance
with their original terms amounted to $134,000, of which $72,000 was included in
interest income at such date.

         At June  30,  1999,  there  were no  non-performing  loans  to a single
borrower or group of related borrowers in excess of $116,000.  At June 30, 1999,
there  were  approximately  $658,000  of  non-accruing  loans  contained  in the
foregoing  table  which  are not  described  in  "Other  Loans  of  Concern"  or
"Classified  Assets" below. These loans are not required to be classified by the
OTS and are adequately  capitalized such that management does not anticipate any
losses relating to these loans.

         Other Loans of Concern.  In addition to the  non-performing  assets set
forth in the table above,  as of June 30,  1999,  there was also an aggregate of
$481,000  in  net  book  value  of  loans  ($80,000  secured  by  single  family
residences,  $401,000 secured by other  commercial  business and none in secured
consumer  loans) with  respect to which  known  information  about the  possible
credit problems of the borrowers have caused management to have doubts as to the
ability of the borrowers to comply with present loan  repayment  terms and which
may result in the future  inclusion  of such items in the  non-performing  asset
categories.

                                       16
<PAGE>
         Classified Assets.  Federal  regulations provide for the classification
of loans and other assets, such as debt and equity securities  considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered  "substandard"  if it is  inadequately  protected  by the current net
worth and paying capacity of the obligor or of the collateral  pledged,  if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard" with the added  characteristic  that
the weaknesses  present make "collection or liquidation in full" on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and  of  such  little  value  that  their  continuance  as  assets  without  the
establishment of a specific loss reserve is not warranted.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem  assets as  "loss,"  it is  required  either  to  establish  a  specific
allowance for losses equal to 100% of that portion of the asset so classified or
to  charge-off  such  amount.   An   institution's   determination   as  to  the
classification  of its  assets  and the amount of its  valuation  allowances  is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.

         In connection with the filing of its periodic  reports with the OTS and
in accordance  with its  classification  of assets  policy,  the Bank  regularly
reviews problem loans and real estate acquired through  foreclosure to determine
whether  such  assets  require  classification  in  accordance  with  applicable
regulations.  On the basis of  management's  review of its  assets,  at June 30,
1999, the Bank had classified a total of $950,000 of its assets as  substandard,
none as  doubtful  and  $18,000  as  loss.  All  portions  of a loan  which  are
classified as loss are reserved for at a rate of 100%.

         At June 30, 1999, total classified assets comprised $968,000,  or 12.0%
of the Bank's capital, or 1.14% of the Bank's total assets.

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity.  Such evaluation,  which includes a review of all loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated  fair  value  of  the  underlying  collateral,   economic  conditions,
historical  loan loss  experience and other factors that warrant  recognition in
providing for an adequate loan loss allowance.  Although  management believes it
uses  the  best  information  available  to  make  such  determinations,  future
adjustments  to  the  allowance  may be  necessary,  and  net  income  could  be
significantly   affected,   if  circumstances   differ  substantially  from  the
assumptions  used in making the initial  determinations.  At June 30, 1999,  the
Bank had an allowance  for loan losses of  $343,000,  or  approximately  .61% of
total loans. See  "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  -- Results of  Operations -- Provision for Losses on
Loans" in the Annual Report.

                                       17
<PAGE>
         The following table sets forth an analysis of the Bank's  allowance for
losses on loans.
<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                           -------------------------------
                                                            1999         1998         1997
                                                           -----        -----        -----
                                                               (Dollars in Thousands)
<S>                                                        <C>          <C>          <C>
Balance at beginning of period ......................      $ 348        $ 348        $ 318

Charge-offs:
  One- to four-family ...............................        (84)         (16)         (15)
  Commercial real estate ............................         --           --           --
  Commercial business ...............................        (24)         (51)        (150)
  Consumer ..........................................        (60)         (30)         (62)
                                                           -----        -----        -----
    Total charge-offs ...............................       (168)         (97)        (227)
                                                           -----        -----        -----

Recoveries:
  Commercial business ...............................         19           --           --
  Consumer ..........................................          5            3            5
                                                           -----        -----        -----
    Total recoveries ................................         24            3            5
                                                           -----        -----        -----

Net charge-offs .....................................       (144)         (94)        (222)
Additions charged to operations .....................        139           94          252
                                                           -----        -----        -----
Balance at end of period ............................      $ 343        $ 348        $ 348
                                                           =====        =====        =====

Ratio of net charge-offs during the period to average
 loans outstanding during the period ................        .26%         .17%         .43%
                                                           =====        =====        =====
</TABLE>

         During the fiscal years ended June 30, 1999, 1998 and 1997,  management
recorded  provisions  for  loan  losses  of  $139,000,   $94,000  and  $252,000,
respectively. These provisions were primarily the result of charge-offs on loans
and  foreclosed  assets  incurred  during  the  periods,  as well as a result of
management's  assessment of additional credit risk associated with the increased
level of the Bank's  consumer and  commercial  business  portfolios  during such
periods.

                                       18
<PAGE>
         The  distribution  of the Bank's  allowance  for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
                                                            At June 30,
                                ------------------------------------------------------------------
                                         1999                   1998                   1997
                                ------------------------------------------------------------------
                                            Percent                 Percent               Percent
                                           of Loans                of Loans              of Loans
                                            in Each                 in Each               in Each
                                           Category                Category              Category
                                           to Total                to Total              to Total
                                 Amount      Loans      Amount       Loans     Amount      Loans
                                ------------------------------------------------------------------
                                                       (Dollars in Thousands)
<S>                              <C>        <C>           <C>       <C>         <C>       <C>
One- to four-family............. $ 69        62.6%       $111        60.1%      $116       64.9%
Multi-family....................    3         2.4           3         2.0          2        1.2
Commercial real estate..........   27         9.6          13         7.8         12        7.4
Residential construction........    1          .3           3         3.5          2        1.6
Consumer........................   91        12.9         111        16.6        103       15.3
Commercial business.............  138        12.2          81        10.0         95        9.6
Unallocated.....................   14         ---          26         ---         18        ---
                                 ----       -----         ----      -----       ----      -----
     Total...................... $343       100.0%        $348      100.0%      $348      100.0%
                                 ====       =====         ====      =====       ====      =====
</TABLE>

Investment Activities

         Horizon  Federal  must  maintain  minimum  levels of  investments  that
qualify as liquid  assets  under OTS  regulations.  Liquidity  may  increase  or
decrease  depending upon the  availability  of funds and  comparative  yields on
investments  in  relation  to the  return on loans.  Historically,  the Bank has
maintained liquid assets at levels above the minimum requirements imposed by OTS
regulations and at levels believed  adequate to meet the  requirements of normal
operations,   including  repayments  of  maturing  debt  and  potential  deposit
outflows.  Cash flow  projections  are regularly  reviewed and updated to assure
that adequate  liquidity is maintained.  At June 30, 1999, the Bank's  liquidity
ratio (liquid assets as a percentage of net  withdrawable  savings  deposits and
current  borrowings)  was 11.5%.  See  "Management's  Discussion and Analysis of
Financial  Condition  and  Results  of  Operations"  in the  Annual  Report  and
"Regulation -- Liquidity."

         Federally  chartered savings  institutions have the authority to invest
in  various  types  of  liquid  assets,  including  U.S.  treasury  obligations,
securities  of various  federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.

         Generally,  the  investment  policy of the Bank, as  established by the
Board of Directors,  is to invest funds among various  categories of investments
and maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality,  marketability and performance objectives. Subject
to the Board's direction,  the Investment  Committee meets monthly to review the
Bank's  investments  and  objectives for its  investment  portfolio.  The Bank's
investment  policy  has  established  methods  and  strategies  for each type of
security.  It is the Bank's  general  policy to purchase  investment  securities
which are U.S.  government  securities or federal  agency  obligations  or other
issues that are rated investment grade.

                                       19
<PAGE>
         The Bank has a portfolio of mortgage-backed  and related securities and
has utilized such investments to complement its mortgage lending activities.  At
June 30, 1999, the Bank's  mortgage-backed  and related securities totaled $13.4
million,  or 15.7% of total assets.  For information  regarding market values of
the Bank's  mortgage-backed and related securities portfolio,  see Note 2 of the
Notes to Consolidated Financial Statements in the Annual Report.

         Historically,  most  of  the  Bank's  mortgage-backed  securities  were
long-term,  fixed-rate  securities.  In more recent years, the Bank has begun to
purchase other types of mortgage-backed  and related securities  consistent with
its asset/liability  management objectives.  In this regard, the Bank emphasizes
the purchase of  adjustable-rate,  mortgage-backed  and related  securities  for
asset/liability  management  purposes  and in order  to  supplement  the  Bank's
origination  of ARM  loans.  At  June  30,  1999  primarily  all  of the  Bank's
mortgage-backed and related securities carried adjustable rates of interest.

         The  Bank's  portfolio  of  Government  National  Mortgage  Association
("GNMA"), FNMA and Federal Home Loan Mortgage Corporation ("FHLMC") certificates
are modified  pass-through  mortgage-backed  securities that generally represent
undivided  interests in  underlying  pools of  fixed-rate,  or certain  types of
adjustable   rate,   single-family   residential   mortgages   issued  by  these
government-sponsored entities. GNMA's guarantee to the holder of timely payments
of  principal  and  interest  is backed by the full faith and credit of the U.S.
government.  FNMA and FHLMC provide the certificate holder a guarantee of timely
payments of interest and scheduled principal payments,  whether or not they have
been   collected.   Under  the  OTS  risk-based   capital   requirements,   GNMA
mortgage-backed  securities  have a zero percent risk weighting and FNMA,  FHLMC
and "AA" or higher-rated  mortgage-backed  securities have a 20% risk weighting,
in contrast to the 50% risk weighting carried by one- to four-family  performing
residential mortgage loans.

         At June 30, 1999 the Bank held $10.6 million of collateralized mortgage
obligations ("CMOs") having estimated lives which ranged from less than one year
up to 8 years.  CMOs are special types of pass-through  debt in which the stream
of   principal   and   interest   payments  on  the   underlying   mortgages  or
mortgage-backed  securities is used to create classes with different  maturities
and, in some cases, amortization schedules, as well as a residual interest, with
each such class possessing different risk  characteristics.  Management believes
these  securities  may  represent  attractive  alternatives  relative  to  other
investments due to the wide variety of maturity and repayment  options available
through such  investments.  Management  has opted to invest in CMO's,  including
interest  only and principal  only CMOs, as opposed to straight  mortgage-backed
securities,  in an effort to improve or maintain spreads. The Bank has leveraged
its  capital  by using  FHLB  advances  to  purchase  many of these  securities.
Management  believes  that the  increased  net income which can result from this
type of  investing  can, at times,  provide  high enough  returns to justify the
increased  vulnerability  of sudden and  unexpected  interest rate changes.  See
"Management's  Discussion  and Analysis and Results of Operations" in the Annual
Report.

         OTS guidelines  regarding  investment  portfolio  policy and accounting
require insured  institutions to categorize  securities and certain other assets
as held for  "investment,"  "sale," or "trading."  The portion of the investment
securities  portfolio  which is held  with the  intent  to hold to  maturity  is
accounted for on an amortized cost basis.  Securities  which are  categorized as
available  for sale are  carried at fair  value.  At June 30,  1999,  all of the
Bank's  investment,  mortgage-backed  and related  securities were classified as
available for sale.

                                       20
<PAGE>
         The following table sets forth the composition of the Bank's  portfolio
of investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
                                                                                     At June 30,
                                                       ---------------------------------------------------------------------
                                                                1999                     1998                     1997
                                                       ---------------------------------------------------------------------
                                                         Carrying     % of      Carrying        % of       Carrying    % of
                                                          Value      Total        Value         Total       Value      Total
                                                       ---------------------------------------------------------------------
                                                                                (Dollars in Thousands)
Investment Securities:
<S>                                                         <C>          <C>        <C>         <C>        <C>          <C>
  U.S. government securities..........................      $   ---        ---%     $   ---       ---%     $   103      1.6%
  Federal agency obligations..........................          844        8.5          869       9.6          849     13.3
  Small business administration loans.................          739        7.4          973      10.7          971     15.3
  Equity securities(1)................................        2,127       21.5        2,428      26.8          589      9.3
                                                            -------      -----      -------     -----      -------    -----
     Subtotal.........................................        3,710       37.4        4,270      47.1        2,512     39.5
FHLB stock............................................        1,203       12.2        1,203      13.3          956     15.0
                                                            -------      -----      -------     -----      -------    -----
     Total investment securities and FHLB stock.......        4,913       49.6        5,473      60.4        3,468     54.5

Other Interest-Earning Assets:
  Interest-bearing deposits with banks................        5,000       50.4        3,581      39.6        2,890     45.5
                                                            -------      -----      -------     -----      -------    -----
     Total............................................      $ 9,913      100.0%     $ 9,054     100.0%     $ 6,358    100.0%
                                                            =======      =====      =======     =====      =======    =====

Average remaining life or term to repricing of
 investment securities and other interest-earning
 assets excluding FNMA stock and FHLB stock...........        2.46 years                3.83 years              5.5 years

Mortgage-Backed and Related Securities:
  CMOs................................................      $10,701       80.0%     $11,723      59.7%     $18,138     80.9%
  FHLMC...............................................          606        4.5          667       3.4          704      3.1
  FNMA................................................          ---        ---          ---     ---          1,399      6.2
  GNMA................................................        1,126        8.4          ---     ---            924      4.1
  Other(2)............................................          954        7.1        7,262      36.9        1,265      5.7
                                                            -------      -----      -------     -----      -------    -----
    Total mortgage-backed and related securities......      $13,387      100.0%     $19,652     100.0%     $22,430    100.0%
                                                            =======      =====      =======     =====      =======    =====
</TABLE>

(1)  Consists  primarily  of  FNMA  Stock,  stocks  of  publicly  traded  thrift
     institutions and thrift holding companies, and mutual funds.

(2)  Consists of  interest  only and  principal  only  stripped  mortgage-backed
     securities.  See Footnote 2 of Notes to Consolidated  Financial  Statements
     contained in the Annual Report.

                                       21
<PAGE>
         The  composition  and  maturities  of the  debt  investment  securities
portfolio,  excluding  equity  securities  and FHLB stock,  are indicated in the
following table.
<TABLE>
<CAPTION>
                                                                  At June 30, 1999
                                 -------------------------------------------------------------------------------
                                   Less Than     1 to 5       5 to 10       Over 10       Total Debt Investment
                                    1 Year        Years        Years         Years              Securities
                                 -------------------------------------------------------------------------------
                                   Carrying     Carrying      Carrying      Carrying       Book         Market
                                     Value        Value        Value         Value         Value         Value
                                 -------------------------------------------------------------------------------
                                                               (Dollars in Thousands)
<S>                                 <C>          <C>           <C>          <C>          <C>            <C>
U.S. government securities.......   $ ---        $ ---         $ ---        $  ---       $  ---         $  ---
Federal agency obligations.......     ---          444           400           ---          844            844
Small business administration
   loans.........................     ---          ---           ---           739          739            739
                                    -----        -----         -----        ------       ------         ------

       Total.....................   $ ---         $444          $400          $739       $1,583         $1,583
                                    =====         ====          ====          ====       ======         ======

Weighted average yield...........    ---%        3.52%         2.71%         7.88%        5.35%          5.35%
</TABLE>

         The following table sets forth the contractual maturities of the Bank's
mortgage-backed and related securities at June 30, 1999;  however,  the expected
average life to maturity of this portfolio is generally two to 10 years.
<TABLE>
<CAPTION>
                                                                                                        At
                                                               Due in                                June 30,
                                    ---------------------------------------------------------------------------
                                                        One to            5 to         10 and          1999
                                       Less than      Less than 5     Less than 10      Over         Balance
                                       One Year          Years           Years         Years       Outstanding
                                    ---------------------------------------------------------------------------
                                                                 (Dollars in Thousands)
<S>                                     <C>              <C>            <C>           <C>           <C>
FHLMC...............................    $ ---            $ ---          $  ---        $  606        $   606
FNMA................................      ---              ---             ---           ---            ---
GNMA................................      ---              ---             ---         1,126          1,126
CMOs................................      ---               38           3,107         7,556         10,701
Other...............................      ---              ---             950             4            954
                                        -----            -----          ------        ------        -------

 Total..............................    $ ---            $  38          $4,057        $9,292        $13,387
                                        =====            =====          ======        ======        =======
</TABLE>

         At  June  30,   1999,   the  Bank's   portfolio   of   investment   and
mortgage-backed  securities  contained  no  securities  of any  issuer  with  an
aggregate  book  value in  excess  of 10% of the  Bank's  stockholders'  equity,
excluding those issued by the U.S. government or its agencies.

         For additional information on the Bank's investment and mortgage-backed
securities,  see Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report.

                                       22
<PAGE>
Sources of Funds

         General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal (including mortgage-backed securities), sales or
maturities of investment securities,  mortgage-backed  securities and short-term
investments, FHLB advances and funds provided from operations.

         Borrowings,  primarily  FHLB  advances,  are  used  to  compensate  for
seasonal  reductions  in  deposits  or deposit  inflows  at less than  projected
levels,  and may be used on a longer-term  basis to support  lending  activities
including CMO  purchases.  At June 30, 1999, the Bank had total FHLB advances of
$16.6 million.

         Deposits. Horizon Federal offers a variety of deposit accounts having a
wide  range of  interest  rates  and  terms.  The  Bank's  deposits  consist  of
commercial demand, savings, checking, money market and certificate accounts. The
certificate  accounts  currently range in terms from 6 months to five years. The
Bank relies  primarily on  advertising  (including  radio,  newspaper and direct
mail),  competitive  pricing policies and customer service to attract and retain
these deposits.  Horizon Federal solicits deposits from its market area only and
does not use brokers to obtain  deposits.  The flow of  deposits  is  influenced
significantly  by  general  economic  conditions,  changes  in money  market and
prevailing  interest  rates  and  competition.  The  composition  of the  Bank's
deposits is set forth in Note 8 of the Notes to Consolidated Financial Statement
in the Annual Report.

         The  deposit  accounts  marketed  by the  Bank  have  allowed  it to be
competitive  in obtaining  funds and to respond with  flexibility  to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows as customers have become more interest rate conscious. The Bank
endeavors   to  manage  the  pricing  of  its   deposits  in  keeping  with  its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain savings  accounts and  certificates of deposit,  and the
rates paid on these  deposits,  has been and will  continue to be  significantly
affected by market conditions.

                                       23
<PAGE>
         The following table sets forth the dollar amount of savings deposits in
the  various  types of  deposit  programs  offered  by the Bank for the  periods
indicated.
<TABLE>
<CAPTION>
                                                                           At June 30,
                                             --------------------------------------------------------------------
                                                      1999                   1998                     1997
                                             --------------------------------------------------------------------
                                                Amount     Percent    Amount      Percent    Amount       Percent
                                             --------------------------------------------------------------------
                                                                      (Dollars in Thousands)
<S>                                            <C>          <C>       <C>         <C>        <C>          <C>
Transactions and Savings Deposits:

Commercial Demand...........................   $ 1,061        1.8%    $   873       1.4%     $ 1,964        3.4%
Checking Accounts (0.0% to 4.8%)............     6,305       10.6       5,580       9.3        4,788        8.3
Savings Accounts (2.3% to 4.9%).............    23,443       39.3      18,276      30.4       16,829       29.2
Money Market Accounts (2.0% to 2.5%)........       463         .8         599       1.0          836        1.5
                                               -------      ------    -------     ------     -------      -----

Total Non-Certificates......................    31,272       52.5      25,328      42.1%      24,417       42.4
                                               -------      -----     -------     -----      -------      -----
Certificates:

 0.00 -  3.99%..............................        11         .1         ---       ---           52         .1
 4.00 -  4.99%..............................    10,251       17.1       3,016       5.0        5,354        9.3
 5.00 -  5.99%..............................    13,505       22.7      24,248      40.3       18,288       31.7
 6.00 -  6.99%..............................     4,360        7.2       6,891      11.5        7,359       12.7
 7.00 -  7.99%..............................       163         .2         553        .9        2,004        3.4
 8.00 -  8.99%..............................         6         .1          94        .1          160         .3
 9.00% and above............................         8         .1          15        .1            7         .1
                                              --------      -----     -------     ------     --------     -----

Total Certificates..........................    28,304       47.5      34,817      57.9       33,224       57.6
                                               -------      -----     -------     -----      -------      -----
Total Deposits..............................   $59,576      100.0%    $60,145     100.0%     $57,641      100.0%
                                               =======      =====     =======     =====      =======      =====
</TABLE>

                                                        24
<PAGE>
         The following table shows rate and maturity  information for the Bank's
certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
                                       0.00-       4.00-      5.00-       6.00-      7.00%                  Percent
                                       3.99%       4.99%      5.99%       6.99%     or more      Total     of Total
                                       -----       -----      -----       -----     -------      -----     --------
                                                                 (Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
-----------------------------
<S>                                      <C>    <C>        <C>          <C>           <C>     <C>          <C>
September 30, 1999..................     ---      2,080      3,239         796         ---      6,115       21.60%
December 31, 1999...................     ---      2,201      1,602         747         ---      4,550       16.08
March 31, 2000......................     ---      1,406        727         985         134      3,252       11.49
June 30, 2000.......................     ---      1,378      2,024       1,001          30      4,433       15.66
September 30, 2000..................      11      1,148      1,314         417           5      2,884       10.19
December 31, 2000...................     ---        461        626         240         ---      1,338        4.73
March 31, 2001......................     ---        207      1,314         101         ---      1,622        5.73
June 30, 2001......................      ---        186        762         ---           8        956        3.38
Thereafter..........................     ---      1,184      1,897          73         ---      3,154       11.14
                                        ----    -------    -------      ------        ----    -------      ------

Total...............................     $11    $10,251    $13,505      $4,360        $177    $28,304      100.0%
                                         ===    =======    =======      ======        ====    =======      =====

   Percent of total.................    .04%     36.22%     47.71%      15.40%        .63%     100.0%
                                        ===      =====      =====       =====         ===      =====
</TABLE>

         The following table indicates the amount of the Bank's  certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1999.
<TABLE>
<CAPTION>
                                                                            Maturity
                                             -------------------------------------------------------------------
                                                                Over         Over
                                                3 Months       3 to 6       6 to 12         Over
                                                or Less        Months       Months        12 months       Total
                                             -------------------------------------------------------------------
                                                                     (Dollars in Thousands)
<S>                                             <C>           <C>          <C>            <C>           <C>
Certificates of deposit of less
 than $100,000..............................    $5,581        $3,651       $7,464         $ 9,420       $26,116

Certificates of deposit of
 $100,000 or more...........................       234           749          221             534         1,738

Public funds(1).............................       300           150          ---             ---           450
                                                ------        ------       ------         -------       -------

Total certificates of
 deposit....................................    $6,115        $4,550       $7,685         $ 9,954       $28,304
                                                ======        ======       ======         =======       =======
</TABLE>

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

(1) Deposits from governmental and other public entities.

         Borrowings.  Although  deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings,  primarily FHLB advances, when
they are a less costly  source of funds or can be invested at a positive rate of
return. In addition,  the Bank may rely upon borrowings for short-term liquidity
needs.

                                       25
<PAGE>
         Horizon  Federal may obtain  advances  from the FHLB of Des Moines upon
the  security of its capital  stock in the FHLB of Des Moines and certain of its
mortgage loans.  Such advances may be made pursuant to several  different credit
programs,  each of which has its own interest rate and range of  maturities.  At
June 30, 1999, the Bank had $16.6 million in FHLB advances.

         The  following  table  sets forth the  maximum  month-end  balance  and
average balance of FHLB advances.  See "Management's  Discussion and Analysis of
Financial  Condition  and  Results of  Operations"  in the  Annual  Report for a
discussion on the increase in the Bank's borrowings.
<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                        ---------------------------------------------
                                                             1999            1998            1997
                                                        ---------------------------------------------
                                                                     (Dollars in Thousands)
<S>                                                        <C>              <C>              <C>
Maximum Balance:
  FHLB advances........................................    $20,636          $25,060          $19,107

Average Balance:
  FHLB advances........................................    $19,038          $22,276          $13,254
</TABLE>

                                       26
<PAGE>
         The  following  table sets forth certain  information  as to the Bank's
FHLB advances at the dates indicated.  For additional  information on the Bank's
advances,  see Note 9 of the Notes to Consolidated  Financial  Statements in the
Annual Report.
<TABLE>
<CAPTION>
                                                                      At June 30,
                                                      ----------------------------------------
                                                          1999          1998           1997
                                                      ----------------------------------------
                                                                (Dollars in Thousands)
<S>                                                     <C>           <C>             <C>
FHLB advances........................................   $16,606       $20,038         $19,102
                                                        =======       =======         =======

Weighted average interest
 rate of FHLB advances...............................     5.07%         5.24%           5.71%
</TABLE>

Subsidiary Activities

         As a federally  chartered savings bank, Horizon Federal is permitted by
OTS  regulations  to invest up to 2% of its assets,  or $1.7 million at June 30,
1999, in the stock of, or loans to, service corporation subsidiaries. As of such
date,  the net  book  value  of  Horizon  Federal's  investment  in its  service
corporation was approximately $49,000.  Horizon Federal may invest an additional
1% of its assets in service  corporations  where such additional  funds are used
for  inner-city  or  community  development  purposes and up to 50% of its total
capital in conforming  loans to service  corporations in which it owns more than
10% of the capital stock.  In addition to  investments in service  corporations,
federal  associations  are permitted to invest an unlimited  amount in operating
subsidiaries  engaged  solely in activities in which a federal  association  may
engage.

         Horizon  Federal  has  one  service  corporation,   Horizon  Investment
Services, Inc. ("HISI"), an Iowa corporation,  located in Oskaloosa, Iowa. HISI,
which  changed its corporate  name in August 1995 from SEI Service  Corporation,
was  organized  by the Bank in 1983 in order to offer a variety of  products  to
customers of Horizon Federal.  For the fiscal year ended June 30, 1999, HISI had
a net gain of $8,300.

Regulation

         General.  Horizon  Federal is a federally  chartered  savings bank, the
deposits of which are federally  insured and backed by the full faith and credit
of the U.S.  government.  Accordingly,  the  Bank is  subject  to broad  federal
regulation and oversight extending to all of its operations.  Horizon Federal is
a member of the FHLB of Des Moines and is subject to certain limited  regulation
by the Board of  Governors  of the  Federal  Reserve  System  ("Federal  Reserve
Board").  As the savings and loan holding  company of the Bank, the Company also
is subject to federal regulation and oversight. The purpose of the regulation of
the  Company  and other  holding  companies  is to  protect  subsidiary  savings
associations.  The Bank is a member of the Savings  Association  Insurance  Fund
("SAIF"),  which  together with the Bank  Insurance Fund (the "BIF") are the two
deposit  insurance funds  administered by the FDIC, and the deposits of the Bank
are  insured  by the FDIC.  As a result,  the FDIC has  certain  regulatory  and
examination authority over the Bank.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

                                       27
<PAGE>
         Federal  Regulation  of  Savings  Associations.  The OTS has  extensive
authority  over  the  operations  of  savings  associations.  As  part  of  this
authority,  the Bank is required to file  periodic  reports  with the OTS and is
subject to periodic  examinations  by the OTS and the FDIC. The last regular OTS
and FDIC  examinations  of the Bank were as of April 19, 1999 and  December  31,
1989,  respectively.  Under  agency  scheduling  guidelines,  it is likely  that
another   examination  will  be  initiated  in  the  near  future.   When  these
examinations  are  conducted by the OTS and the FDIC,  the examiners may require
the Bank to provide  for higher  general or  specific  loan loss  reserves.  All
savings  associations  are subject to a semi-annual  assessment,  based upon the
savings  association's  total  assets,  to fund the  operations  of the OTS. The
Bank's OTS assessment for the fiscal year ended June 30, 1999 was $32,000.

         The OTS also  has  extensive  enforcement  authority  over all  savings
institutions  and their holding  companies,  including the Bank and the Company.
This enforcement  authority includes,  among other things, the ability to assess
civil  money  penalties,  to issue  cease-and-desist  or  removal  orders and to
initiate  injunctive  actions.  In  general,  these  enforcement  actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.

         In addition,  the  investment,  lending and branching  authority of the
Bank is  prescribed  by federal law, and it is  prohibited  from engaging in any
activities not permitted by such laws. For instance,  no savings institution may
invest in  non-investment  grade  corporate debt  securities.  In addition,  the
permissible  level of  investment  by federal  associations  in loans secured by
non-residential real property may not exceed 400% of total capital,  except with
approval of the OTS. Federal savings  associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.

         The Bank's general permissible lending limit for  loans-to-one-borrower
is equal to the  greater of $500,000  or 15% of  unimpaired  capital and surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1999, the Bank's lending limit under this restriction was approximately
$915,000.

         The OTS, as well as the other  federal  banking  agencies,  has adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  asset quality,  earnings  standards,  internal
controls and audit  systems,  interest rate risk exposure and  compensation  and
other  employee  benefits.  Any  institution  which  fails to comply  with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an  approved  plan will  subject  the  institution  to further  enforcement
action.

         Insurance of Accounts and Regulation by the FDIC.  Horizon Federal is a
member of the SAIF,  which is administered by the FDIC.  Deposits are insured up
to applicable  limits by the FDIC and such insurance is backed by the full faith
and  credit  of the  U.S.  government.  As  insurer,  the FDIC  imposes  deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured  institutions.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
order  to pose a  serious  risk to the SAIF of the  BIF.  The FDIC  also has the
authority to initiate enforcement actions against savings

                                       28
<PAGE>
associations,  after giving the OTS an opportunity to take such action,  and may
terminate  the deposit  insurance  if it  determines  that the  institution  has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

         The FDIC is authorized to increase  assessment  rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC.

         As is the case  with the SAIF,  the FDIC is  authorized  to adjust  the
insurance  premium  rates for banks  that are  insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory  reserve  ratio,  the FDIC revised
the premium schedule for BIF insured  institutions to provide a range of .04% to
 .31% of deposits.  The revisions  became effective in the third quarter of 1995.
In addition,  the BIF rates were further  revised,  effective  January  1996, to
provide a range of 0% to .27%. The SAIF rates,  however,  were not adjusted.  At
the time the FDIC  revised  the BIF  premium  schedule,  it noted  that,  absent
legislative  action  (as  discussed  below),  the  SAIF  would  not  attain  its
designated reserve ratio until the year 2002. As a result,  SAIF insured members
would continue to be generally subject to higher deposit insurance premiums than
BIF insured  institutions  until,  all things being equal, the SAIF attained its
required reserve ratio.

         In order to eliminate this disparity and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation to  recapitalize  the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to  recapitalize  the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if  no  savings  associations  then  exist.  The  special  assessment  rate  was
established  at .657% of deposits by the FDIC and the  resulting  assessment  of
$331,000  was paid in  November  1996.  This  special  assessment  significantly
increased  noninterest  expense and  adversely  affected the  Company's  and the
Bank's  results of  operations  for the year ended June 30, 1997. As a result of
the special  assessment,  the Bank's deposit  insurance  premiums was reduced to
zero based upon its current risk  classification and the new assessment schedule
for SAIF insured  institutions.  These  premiums are subject to change in future
periods.

                                       29
<PAGE>
         Prior  to the  enactment  of the  legislation,  a  portion  of the SAIF
assessment imposed on savings  associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift  crisis in the 1980s.  Although the FDIC has  proposed  that the SAIF
assessment be equalized with the BIF assessment  schedule,  effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing  obligation.  Although the  legislation  also now
requires  assessments to be made on BIF-  assessable  deposits for this purpose,
effective  January 1, 1997,  that  assessment will be limited to 20% of the rate
imposed on SAIF  assessable  deposits  until the earlier of December 31, 1999 or
when no  savings  association  continues  to exist,  thereby  imposing a greater
burden  on SAIF  member  institutions  such as the  Bank.  Thereafter,  however,
assessments  on  BIF-member  institutions  will  be made on the  same  basis  as
SAIF-member institutions.

         Regulatory    Capital    Requirements.    Federally   insured   savings
associations,  such as the Bank,  are  required to  maintain a minimum  level of
regulatory  capital.  The OTS has  established  capital  standards,  including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations.  These
capital  requirements  must be generally as stringent as the comparable  capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis.

         The capital  regulations  require  tangible capital of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the requirement.  At June 30, 1999, the Bank did not have any intangible  assets
or purchased mortgage servicing rights.

         The OTS regulations establish special  capitalization  requirements for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from  assets  and  capital.   All   subsidiaries  of  the  Bank  are  includable
subsidiaries.

         At June 30, 1999,  the Bank had tangible  capital of $5.8  million,  or
6.9% of adjusted  total assets,  which is  approximately  $4.5 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

         The capital standards also require core capital equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however, a savings  association must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1999, the Bank
had no intangibles which were subject to these tests.

                                       30
<PAGE>
         At June 30, 1999,  the Bank had core capital equal to $5.8 million,  or
6.9% of adjusted total assets,  which is $3.3 million above the minimum leverage
ratio requirement of 3% as in effect on that date.

          The OTS risk-based  requirement  requires savings associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of  non-traditional  activities.  At June 30, 1999, the Bank had no
capital  instruments  that  qualify as  supplementary  capital,  and $325,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.

         Certain  exclusions from capital and assets are required to be made for
the purpose of calculating  total  capital.  Such  exclusions  consist of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal  holdings of qualifying  capital  instruments.  Horizon Federal had a
$9,000 exclusion from capital and assets at June 30, 1999.

         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the OTS has assigned a risk weight of 50% for  prudently  underwritten
permanent  one- to  four-family  first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value  ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         OTS regulations  also require that every savings  association with more
than normal  interest rate risk exposure to deduct from its total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest-rate  risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings  association,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule will not become effective until the OTS
evaluates the process by which savings  associations may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed.  Any savings  association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement  unless the
OTS determines otherwise.

         On June 30, 1999, the Bank had total capital of $6.1 million (including
$5.8 million in core capital and $325,000 in qualifying  supplementary  capital)
and  risk-weighted  assets of $48.4  million  (including  $794,000 in  converted
off-balance  sheet assets);  or total capital of 12.6% of risk-weighted  assets.
This amount was $2.2 million above the 8% requirement in effect on that date.

         The OTS and the FDIC are authorized  and,  under certain  circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is

                                       31
<PAGE>
generally   required  to  take  action  to  restrict   the   activities   of  an
"undercapitalized  association"  (generally  defined  to be one with  less  than
either a 4% core capital ratio, a 4% Tier 1 risked-based  capital ratio or an 8%
risk-based   capital  ratio).   Any  such  association  must  submit  a  capital
restoration plan and until such plan is approved by the OTS may not increase its
assets,  acquire  another  institution,  establish a branch or engage in any new
activities,  and  generally  may  not  make  capital  distributions.  The OTS is
authorized  to  impose  the  additional  restrictions  that  are  applicable  to
significantly undercapitalized associations.

          As a condition to the approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  association  must agree that it will
enter  into  a  limited  capital  maintenance  guarantee  with  respect  to  the
institution's achievement of its capital requirements.

         Any savings  association  that fails to comply with its capital plan or
is  "significantly  undercapitalized"  (i.e.,  Tier 1 risk-based or core capital
ratios of less than 3% or a  risk-based  capital  ratio of less than 6%) must be
made  subject  to one or more of  additional  specified  actions  and  operating
restrictions, which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general enforcement  authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

         The OTS is also generally  authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

         Supervisory   Agreement.   The  Bank  was  required  to  enter  into  a
Supervisory Agreement with the OTS on August 27, 1999. The Supervisory Agreement
generally  required  the Bank to (i)  comply  with  specified  federal  laws and
regulations  regarding management and financial policies,  the establishment and
maintenance of records and interest-risk  management policies and procedures and
to (ii) take certain corrective actions regarding the disposal of certain of the
Bank's  securities  classified  as  high-risk,  the  maintenance  of at  least a
moderate level of interest rate risk, the prior receipt of a "no objection" from
the OTS before the Bank buys,  exchanges or otherwise changes positions with any
security  it  owns,  and the  development  of  loan  underwriting  policies  and
procedures.  In addition,  the Bank is required to obtain prior written approval
of the OTS before it may pay any dividends to the holding company.

         The  imposition by the OTS or the FDIC of any of these  measures on the
Company  or the Bank may have a  substantial  adverse  effect  on the  Company's
operations  and  profitability.  Company  shareholders  do not  have  preemptive
rights,  and  therefore,  if the  Company is  directed by the OTS or the FDIC to
issue  additional  shares of  Common  Stock,  such  issuance  may  result in the
dilution in the percentage of ownership of the Company.

         Limitations   on  Dividends  and  Other  Capital   Distributions.   OTS
regulations impose various  restrictions on savings associations with respect to
their ability to make distributions of capital,  which include dividends,  stock
redemptions or repurchases, cash-out mergers and other transactions

                                       32
<PAGE>
charged  to the  capital  account.  OTS  regulations  also  prohibit  a  savings
association  from declaring or paying any dividends or from  repurchasing any of
its stock if, as a result,  the regulatory  capital of the association  would be
reduced below the amount required to be maintained for the  liquidation  account
established in connection with its mutual to stock conversion.

         Generally,  savings  associations,  such as the Bank,  that  before and
after  the  proposed  distribution  remain  well-capitalized,  may make  capital
distributions  during  any  calendar  year  equal to the  greater of 100% of net
income for the  year-to-date  plus  retained  net  income for the two  preceding
years.  However,  an  institution  deemed  to be in  need of  more  than  normal
supervision  by the OTS may have its dividend  authority  restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.

         Savings  associations  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  associations  that do not,  or would  not meet  their  current  minimum
capital requirements  following a proposed capital  distribution,  however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution  during that 30-day period based on safety and soundness  concerns.
See "Regulation -- Supervisory Agreement."

         Liquidity.  All savings associations,  including the Bank, are required
to  maintain  an  average  daily  balance  of liquid  assets  equal to a certain
percentage of the sum of their average daily balance of net withdrawable deposit
accounts and  borrowings  payable in one year or less.  For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report.  This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending  upon economic  conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 4%.  Penalties may be imposed upon  associations for violations of the liquid
asset ratio requirement.  At June 30, 1999, the Bank was in compliance with this
requirement, with an overall liquid asset ratio of 11.5%.

         Accounting.   An  OTS  policy  statement   applicable  to  all  savings
associations  clarifies and  re-emphasizes  that the investment  activities of a
savings   association  must  be  in  compliance  with  approved  and  documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement,  management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.

         OTS accounting regulations,  which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must  incorporate any other accounting  regulations or orders  prescribed by the
OTS.

         Qualified Thrift Lender Test. All savings  associations,  including the
Bank,  are  required to meet a qualified  thrift  lender  ("QTL")  test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code of 1986, as amended (the "Code").

                                       33
<PAGE>
Such  assets  primarily  consist  of  residential   housing  related  loans  and
investments. At June 30, 1999, the Bank met the test and has always met the test
since its effectiveness.

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,   it  must  divest  of  all   investments   and  cease  all  activities
impermissible  for a national  bank.  In  addition,  it must repay  promptly any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

         Community  Reinvestment  Act.  Under  the  Community  Reinvestment  Act
("CRA"),  every  FDIC  insured  institution  has a  continuing  and  affirmative
obligation  consistent  with safe and sound  banking  practices to help meet the
credit  needs  of its  entire  community,  including  low  and  moderate  income
neighborhoods.  The CRA does not  establish  specific  lending  requirements  or
programs  for  financial   institutions  nor  does  it  limit  an  institution's
discretion  to develop the types of products and  services  that it believes are
best  suited  to its  particular  community,  consistent  with the CRA.  The CRA
requires the OTS, in connection  with the examination of the Bank, to assess the
institution's  record of meeting the credit needs of its  community  and to take
such record into account in its  evaluation of certain  applications,  such as a
merger or the establishment of a branch,  by the Bank. An unsatisfactory  rating
may be used as the basis for the denial of an application by the OTS.

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  the Bank may be required to devote  additional funds for
investment  and lending in its local  community.  The Bank was  examined for CRA
compliance in March 1998 and received a rating of "satisfactory."

         Transactions with Affiliates. Generally, transactions between a savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain of these  transactions,  such as loans to an  affiliate,  are
restricted to a percentage of the association's capital.  Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition,  a savings  association  may not lend to any  affiliate  engaged in
activities not  permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates;  however,
the OTS has the  discretion to treat  subsidiaries  of savings  associations  as
affiliates on a case by case basis.

         Certain  transactions with directors,  officers or controlling  persons
are also subject to conflict of interest  regulations enforced by the OTS. These
conflict of interest regulations and other statutes

                                       34
<PAGE>
also impose  restrictions on loans to such persons and their related  interests.
Among other things,  such loans must be made on terms  substantially the same as
for loans to unaffiliated individuals.

         Holding Company  Regulation.  The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is  required  to  register  and  file  reports  with the OTS and is  subject  to
regulation  and  examination  by the OTS. In addition,  the OTS has  enforcement
authority over the Company and its non-savings  association  subsidiaries  which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary savings association.

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such  restrictions  unless such other  associations each
qualify as a QTL and were acquired in a supervisory acquisition.

         If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing  after such  failure,  directly or through its other
subsidiaries,  any  business  activity  other than those  approved  for multiple
savings and loan holding companies or their  subsidiaries.  In addition,  within
one year of such failure,  the Company must register as, and will become subject
to, the  restrictions  applicable  to bank  holding  companies.  The  activities
authorized  for a bank holding  company are more limited than are the activities
authorized  for a unitary or multiple  savings  and loan  holding  company.  See
"--Qualified Thrift Lender Test."

         The Company must obtain approval from the OTS before acquiring  control
of  any  other  SAIF-insured   association.   Such  acquisitions  are  generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

         Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities  Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information,  proxy solicitation,  insider trading
restrictions and other requirements of the SEC under the Exchange Act.

         Company stock held by persons who are affiliates  (generally  officers,
directors and principal  stockholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  Company  is  able  to  sell  in the  public  market,  without
registration, a limited number of shares in any three-month period.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking  accounts).  At June 30, 1999,  the Bank was in  compliance  with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the OTS. See "--Liquidity."

                                       35
<PAGE>
         Savings  associations are authorized to borrow from the Federal Reserve
Bank  "discount   window,"  but  Federal  Reserve  Board   regulations   require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

         Federal Home Loan Bank System.  The Bank is a member of the FHLB of Des
Moines,  which is one of 12 regional  FHLBs that  administer  the home financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central  bank  for its  members  within  its  assigned  region.  Each is  funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB  System.  It makes loans to members  (i.e.,  advances) in  accordance  with
policies  and  procedures,  established  by the board of  directors of the FHLB,
which are subject to the oversight of the Federal  Housing  Finance  Board.  All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition,  all long-term  advances are required to
provide funds for residential home financing.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines.  At June 30, 1999,  the Bank had $1.2 million in FHLB stock,
which was in  compliance  with this  requirement.  In past  years,  the Bank has
received  substantial  dividends on its FHLB stock. For the years ended June 30,
1999 and  1998,  dividends  paid by the FHLB of Des  Moines to  Horizon  Federal
totaled $77,000,  and $78,000,  respectively.  The $18,700 dividend received for
the quarter ended June 30, 1999 reflects an annualized rate of 6.25%, .38% below
the rate for calendar 1998.  Over the past five fiscal years such dividends have
averaged 7.05%.

         Under  federal  law the FHLBs are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in value of the  Bank's  FHLB  stock may  result  in a  corresponding
reduction in the Bank's capital.

Federal and State Taxation

         Federal Taxation. For years prior to 1997, savings associations such as
the Bank that meet certain  definitional  tests  relating to the  composition of
assets and other conditions  prescribed by the Code, were permitted to establish
reserves for bad debts and to make annual  additions  thereto which may,  within
specified  formula limits,  be taken as a deduction in computing  taxable income
for federal  income tax purposes.  The amount of the bad debt reserve  deduction
for "non-qualifying  loans" was computed under the experience method. The amount
of  the  bad  debt  reserve  deduction  for  "qualifying  real  property  loans"
(generally  loans secured by improved real estate) was computed under either the
experience method or the percentage of taxable income method (based on an annual
election).  Under the experience  method,  the bad debt reserve  deduction is an
amount  determined  under a formula based  generally upon the bad debts actually
sustained by the savings association over a period of years.

         The  percentage of specially  computed  taxable  income that is used to
compute a savings  association's bad debt reserve deduction under the percentage
of taxable  income  method  (the  "percentage  bad debt  deduction")  is 8%. The
percentage bad debt deduction thus computed is

                                       36
<PAGE>
reduced by the amount  permitted as a deduction for  non-qualifying  loans under
the  experience  method.  The  availability  of the percentage of taxable income
method permits qualifying savings  associations to be taxed at a lower effective
federal  income  tax  rate  than  that  applicable  to  corporations   generally
(approximately 31.3% assuming the maximum percentage bad debt deduction).

         Under the percentage of taxable income method,  the percentage bad debt
deduction  cannot  exceed the amount  necessary  to increase  the balance in the
reserve for  "qualifying  real property  loans" to an amount equal to 6% of such
loans  outstanding  at the end of the  taxable  year or the  greater  of (i) the
amount  deductible  under the  experience  method or (ii) the amount  which when
added to the bad debt deduction for "non-qualifying loans" equaled the amount by
which 12% of the amount comprising  savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.

         In August  1996,  legislation  was enacted  that  repealed  the reserve
method of accounting  (including  the  percentage of taxable income method which
was used in prior  years)  used by many  thrifts  to  calculate  their  bad debt
reserve for federal income tax purposes.  Thrift  institutions with $500 million
or less in assets may,  however,  continue to use the  experience  method.  As a
result,  the Bank must  recapture  that  portion of the reserve that exceeds the
amount that could have been taken under the experience  method for post-1987 tax
years.  At June 30,  1999,  the Bank's  post-1987  excess  reserves  amounted to
approximately $167,000. The recapture will be approximately $56,000 per year and
will occur over a six-year  period which began in fiscal 1997.  The  legislation
also requires  thrift  institutions  to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. As a result,  the Company  computes its bad debt deduction on
the experience method.

         In addition to the regular income tax, corporations,  including savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, were also subject to an environmental tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

         To the extent earnings appropriated to a savings association's bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of June 30,  1999,  the  Bank's  Excess  for tax  purposes  totaled
approximately $1.3 million.

         The Company,  the Bank and its  subsidiary  file  consolidated  federal
income  tax  returns  on a  fiscal  year  basis  using  the  accrual  method  of
accounting.

                                       37
<PAGE>
         The federal  income tax returns of the Company for the last three years
are open to possible  audit by the Internal  Revenue  Service  (the  "IRS").  No
returns  are being  audited by the IRS at the  current  time.  In the opinion of
management,  any  examination  of  still  open  returns  (including  returns  of
subsidiary  and  predecessors  of, or entities  merged into, the Bank) would not
result  in a  deficiency  which  could  have a  material  adverse  effect on the
financial condition of the Bank and its subsidiary.

         Iowa  Taxation.  Iowa imposes a franchise tax on the taxable  income of
both mutual and stock savings banks.  The tax rate is 5%, which may  effectively
be increased,  in individual  cases,  by application of a minimum tax provision.
Taxable  income under the franchise tax is generally  similar to taxable  income
under the federal  corporate  income tax, except that,  under the Iowa franchise
tax, no deduction is allowed for Iowa  franchise tax payments and taxable income
includes  interest  on  state  and  municipal  obligations.   Interest  on  U.S.
obligations  is  taxable  under the Iowa  franchise  tax and  under the  federal
corporate  income  tax.  For Iowa state tax  purposes,  the Company and SEI file
income tax returns and the Bank files a franchise tax return.

         Delaware  Taxation.  As a  Delaware  holding  company,  the  Company is
exempted  from Delaware  corporate  income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware.  The Company is also
subject to an annual franchise tax imposed by the State of Delaware.

Competition

         Horizon  Federal faces strong  competition,  both in  originating  real
estate loans and in attracting deposits.  Competition in originating real estate
loans comes primarily from commercial and savings banks, and to a lesser extent,
credit  unions  located in the Bank's  market area.  Commercial  banks,  savings
banks,  credit unions and finance  companies  provide  vigorous  competition  in
consumer lending.  The Bank competes for real estate and other loans principally
on the basis of the quality of services it provides to  borrowers,  the interest
rates it charges,  loan fees it charges,  and the types of loans it  originates.
See "-- Lending Activities."

         The Bank  attracts  all of its  deposits  through  its  retail  banking
offices,  primarily from the  communities in which those retail banking  offices
are located.  Therefore,  competition  for those  deposits is  principally  from
commercial  banks,  savings banks,  credit unions and  investment  banking firms
located in these communities. The Bank competes for these deposits by offering a
variety of account alternatives at competitive rates and by providing convenient
business  hours,   branch  locations  and  interbranch  deposit  and  withdrawal
privileges at each.

         The Bank serves Mahaska County and that portion of Marion County in and
around Knoxville, Iowa. There are nine commercial banks, one savings bank, other
than Horizon  Federal,  and three credit  unions which  compete for deposits and
loans in Horizon  Federal's primary market area. The Bank estimates its share of
the savings market in its primary market area to be approximately 10%.

Employees

         At June  30,  1999,  the  Bank  had a total  of 26  full-time  and five
part-time employees.  The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.

                                       38
<PAGE>
         The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and the
Bank  who do not  serve  on the  Company's  Board  of  Directors.  There  are no
arrangements  or  understandings  between the persons named and any other person
pursuant to which such officers were selected.

         Sharon K. McCrea - Ms. McCrea,  age 57, joined Horizon Federal in 1959,
as a teller, was appointed Assistant Treasurer in 1974 and promoted to Treasurer
and  Comptroller  of the Bank in 1979. Ms. McCrea is in charge of the accounting
department of the Bank.

         Kent R.  Frankenfeld  - Mr.  Frankenfeld,  age 43,  joined  the Bank in
October 1994, as Vice President in charge of Marketing and Product  Development.
Mr.  Frankenfeld was the Vice President of a savings bank located in Des Moines,
Iowa prior to joining the Bank.

Item 2.  Description of Property

         The Bank conducts its business through its three offices,  two of which
are located in Oskaloosa,  Iowa and one in Knoxville,  Iowa. The following table
sets forth  information  relating  to each of the Bank's  offices as of June 30,
1999. The total net book value of the Bank's  premises and equipment  (including
land,  buildings  and  leasehold   improvements  and  furniture,   fixtures  and
equipment) at June 30, 1999 was approximately $1.1 million.  See Note 6 of Notes
to Consolidated Financial Statements in the Annual Report.
<TABLE>
<CAPTION>
                                                                          Total
                                                                       Approximate
                                                        Date              Square              Net Book Value at
                     Location                         Acquired           Footage                June 30, 1999
---------------------------------------------------------------------------------------------------------------
<S>                                                     <C>               <C>                      <C>
Main Office:
 301 First Avenue East                                  1964              4,230                    $307,000
 Oskaloosa, Iowa

Branch Offices:
 509 A Avenue, West                                     1992              3,277                     575,000
 Oskaloosa, Iowa

 1022 West Pleasant Street                              1979              1,598                     207,000
 Knoxville, Iowa
</TABLE>

         Horizon  Federal  believes that its current  facilities are adequate to
meet the present and foreseeable needs of the Bank and the Company in Oskaloosa,
Iowa, but some expansion of our Knoxville facility is being considered.

         The Bank maintains an on-line data base with a service bureau servicing
financial  institutions.  The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1999 was approximately $140,000.

                                       39
<PAGE>
Item 3.  Legal Proceedings

         Horizon  Federal  is  involved,  from  time to time,  as  plaintiff  or
defendant  in  various  legal  actions  arising  in the  normal  course of their
businesses.  While the ultimate outcome of these proceedings cannot be predicted
with certainty, it is the opinion of management, after consultation with counsel
representing  Horizon Federal in the  proceedings,  that the resolution of these
proceedings  should not have a material effect on Horizon  Federal's  results of
operations.

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

         No matter was  submitted  to a vote of  security  holders  through  the
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year ended June 30, 1999.


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         Page  44  of  the  attached  1999  Annual  Report  to  Stockholders  is
incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation

         Pages 4 through 16 of the attached 1999 Annual  Report to  Stockholders
are incorporated herein by reference.

Item 7.  Financial Statements

         The following information appearing in the Company's 1999 Annual Report
to  Stockholders  for the year ended June 30, 1999,  is  incorporated  herein by
reference.

Annual Report Section                                     Pages in Annual Report
---------------------                                     ----------------------

Independent Auditors' Report                                         17

Consolidated Balance Sheets as of June 30, 1999 and 1998             18

Consolidated Statements of Operations for the Years Ended            19
 June 30, 1999, 1998 and 1997

Consolidated Statements of Changes in Stockholders' Equity and       20
 Comprehensive Income for Years Ended June 30, 1999, 1998 and 1997

Consolidated Statements of Cash Flows for Years Ended                21
 June 30, 1999, 1998 and 1997

Notes to Consolidated Financial Statements                           22


                                       40
<PAGE>
         With the  exception of the  aforementioned  information,  the Company's
Annual  Report to  Stockholders  for the year ended June 30, 1999, is not deemed
filed as part of this Annual Report on Form 10-KSB.

Item 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

         There has been no  Current  Report  on Form 8-K filed  within 24 months
prior to the date of the most recent financial  statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

Directors

         Information  concerning Directors of the Company is incorporated herein
by reference  from the  definitive  proxy  statement  for the Annual  Meeting of
Stockholders to be held in October 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.

Executive Officers

         Information regarding the business experience of the executive officers
of the  Company  and  the  Bank  contained  in  Part I of this  Form  10-KSB  is
incorporated herein by reference.

Compliance with Section 16(a)

         Information  concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is  incorporated  herein by reference  from the  definitive
Proxy  Statement for the Annual  Meeting of  Stockholders  to be held in October
1999,  a copy of which  will be filed not later than 120 days after the close of
the fiscal year.

Item 10.  Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders to be held in October 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.

Item 11.  Security  Ownership of Certain Beneficial Owners and Management

         Information  concerning security ownership of certain beneficial owners
and management is  incorporated  herein by reference  from the definitive  Proxy
Statement for the Annual Meeting of  Stockholders  to be held in October 1999, a
copy of which  will be filed  not  later  than 120 days  after  the close of the
fiscal year.

                                       41
<PAGE>
Item 12.  Certain Relationships and Related Transactions

         Information  concerning certain  relationships and related transactions
is incorporated  herein by reference from the definitive Proxy Statement for the
Annual Meeting of  Stockholders to be held in October 1999, a copy of which will
be filed not later than 120 days after the close of the fiscal year.

Item 13.          Exhibits and Reports on Form 8-K

                  (a)  Exhibits -- See Index to Exhibits.

                  (b)  Reports  on Form 8-K -- No reports on Form 8-K were filed
                  during the three-month period ended June 30, 1999.





                                       42
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           HORIZON FINANCIAL SERVICES
                                           CORPORATION



Date: September 28, 1999                   By: /s/ Robert W. DeCook
      ------------------                       ---------------------
                                                Robert W. DeCook, President and
                                                 Chief Executive Officer
                                                (Duly Authorized Representative)

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.



/s/ Robert W. DeCook                         /s/ Thomas L. Gillespie
---------------------------                  ---------------------------
Robert W. DeCook, Director, President       Thomas L. Gillespie, Director and
 and Chief Executive Officer                Vice President
 (Principal Executive Officer)

Date: September 28, 1999                     Date: September 28, 1999
      ------------------                           ------------------


/s/ Gary L. Rozenboom                        /s/ Dwight L. Groves
---------------------------                  ---------------------------
Gary L. Rozenboom, Director                  Dwight L. Groves, Director

Date: September 28, 1999                     Date: September 28, 1999
      ------------------                           ------------------


/s/ Norman P. Zimmerman                      /s/ Sharon K. McCrea
---------------------------                  ---------------------------
Norman P. Zimmerman, Director                Sharon K. McCrea, Treasurer and
                                               Comptroller, (Principal Financial
                                               and Accounting Officer)

Date: September 28, 1999                     Date: September 28, 1999
      ------------------                           ------------------

                                       43
<PAGE>
                                Index to Exhibits

 Exhibit
 Number                                Document
 ------                                --------

   3              The Articles of Incorporation  and Bylaws,  filed on March 18,
                  1994 as exhibits 3.1 and 3.2,  respectively,  to  Registrant's
                  Registration Statement on Form S-1 (File No.
                  33-76674), are incorporated herein by reference.

   4              Registrant's  Specimen Stock  Certificate,  filed on March 18,
                  1994 as Exhibit 4 to  Registrant's  Registration  Statement on
                  Form S-1  (File  No.  33-76674),  is  incorporated  herein  by
                  reference.

10.1              Registrant's Employee Stock Ownership Plan, filed on March 18,
                  1994 as Exhibit 10.3 to Registrant's Registration Statement on
                  Form S-1  (File  No.  33-76674),  is  incorporated  herein  by
                  reference.

10.2              Employment  Agreements between the Bank and Messrs. DeCook and
                  Gillespie,  filed as Exhibits 10.1 and 10.2, respectively,  to
                  Registrant's  Annual Report on Form 10-KSB for the fiscal year
                  ended  June 30,  1994  (File No.  0-24036),  are  incorporated
                  herein by reference.

10.3              1994 Stock Option and Incentive Plan, filed as Exhibit 10.3 to
                  Registrant's  Annual Report on Form 10-KSB for the fiscal year
                  ended June 30, 1994 (File No. 0-24036), is incorporated herein
                  by reference.

10.4              Recognition  and  Retention  Plan,  filed as Exhibits  10.4 to
                  Registrant's  Annual Report on Form 10-KSB for the fiscal year
                  ended June 30, 1994 (File No. 0-24036), is incorporated herein
                  by reference.

13                Annual Report to Stockholders

21                Subsidiaries of the Registrant

27                Financial Data Schedule (electronic filing only)


                                       44