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2004 ANNUAL REPORT
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                           HORIZON FINANCIAL SERVICES
                                   CORPORATION

<PAGE>

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TABLE OF CONTENTS

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         President's Letter to Shareholders...............................    1
         Selected Consolidated Financial Information......................    2
         Management's Discussion and Analysis of Financial
           Condition and Results of Operations............................    4
         Consolidated Financial Statements................................   19
         Stockholder Information..........................................   46
         Corporate Information............................................   48

                          Annual Report on Form 10-KSB

A copy of Horizon Financial Services  Corporation's Annual Report on Form 10-KSB
for the year ended June 30,  2004,  as filed with the  Securities  and  Exchange
Commission,  may be obtained  without  charge by  contacting  Robert W.  DeCook,
President and Chief Executive Officer,  Horizon Financial Services  Corporation,
301 1st Avenue East, Oskaloosa, Iowa, (641) 673-8328.

<PAGE>

                         [HORIZON FINANCIAL LETTERHEAD]

September 28, 2004

Dear Stockholder:

I am very  pleased to report to you that our fiscal year ended June 30, 2004 was
one of strong  profitability  that produced a 12.15%  return on equity.  Our net
earnings for the year were $1,331,000,  or $1.72 per share fully diluted,  and a
1.40% return on average assets compared to net earnings of $1,139,000,  or $1.48
per share fully  diluted,  for the prior fiscal year, an improvement of 16.8%. A
core earnings  increase of $397,000 was the primary factor for such a successful
year.

Fiscal 2004 represents the fifth year of a five year period during which we have
achieved,  with your help,  consistent  growth in net  earnings,  dividends  per
share, and return on assets.

Net interest  income,  representing  our core  earnings,  was $4.17  million for
fiscal  2004  compared  to $3.78  million  for the prior  fiscal  year,  a 10.5%
increase during a period of decreasing interest rates. Net interest income after
provision  for losses on loans in fiscal 2004 was $3.9 million  compared to $3.5
million in fiscal 2003. Our average interest rate spread, the difference between
the yield  earned on  interest  earning  assets and the rates  paid on  interest
bearing  liabilities,  was 4.33%  compared to 3.98% for 2003.  Our net  interest
margin,  net interest  income divided by average  interest-earning  assets,  was
4.61% and 4.31% for the fiscal years 2004 and 2003, respectively.

Total assets  increased by $7.7 million to $99.0 million and deposits  increased
by $4.3  million.  The  increase in assets was  primarily  due to an increase in
loans of $14.4 million. Securities available for sale decreased $4.7 million, to
$12.5 million, in an environment of increased lending activity.

As we look forward to the coming year,  we are  delighted  that we have opened a
new banking office in the rapidly growing  community of Pleasant Hill,  Iowa. We
expect this new office to increase growth in the company at a faster pace.

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

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

Yours very truly,


Robert W. DeCook
President and Chief Executive Officer

<PAGE>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                         At June 30,
                                                         --------------------------------------------------------------------------
                                                           2004            2003             2002              2001            2000
                                                         --------        --------         --------         --------        --------
                                                                                       (In Thousands)
<S>                                                      <C>             <C>              <C>              <C>             <C>
Selected Financial Condition Data:
----------------------------------

Total Assets ....................................        $ 99,038        $ 91,322         $ 88,438         $ 89,416        $ 83,184
Cash and cash equivalents .......................           1,863           5,304            8,125            5,592           1,981
Securities available-for-sale ...................          12,494          17,176           12,086           15,525          15,670
Loans receivable, net ...........................          79,379          65,007           65,099           65,446          62,417
Deposits ........................................          78,723          74,423           71,954           69,872          64,761
Advances from FHLB ..............................           7,958           5,545            5,571            9,593           9,014
Stockholders' equity ............................          11,465          10,444            9,403            8,446           8,266

<CAPTION>
                                                                                    Year Ended June 30,
                                                         --------------------------------------------------------------------------
                                                           2004            2003             2002              2001            2000
                                                         --------        --------         --------         --------        --------
                                                                           (In Thousands, Except Per Share Data)
<S>                                                      <C>             <C>              <C>              <C>             <C>
Selected Operations Data:
-------------------------

Total interest income ...........................        $  5,801        $  5,805         $  6,152         $  6,575        $  6,171
Total interest expense ..........................           1,629           2,030            2,734            3,924           3,448
                                                         --------        --------         --------         --------        --------
  Net interest income ...........................           4,172           3,775            3,418            2,651           2,723
Provisions for losses on loans ..................             300             236              332              276              96
                                                         --------        --------         --------         --------        --------
Net interest income after
  provision for losses on loans .................           3,872           3,539            3,086            2,375           2,627
Noninterest income
  Fees, commissions and service charges .........             710             648              630              595             470
  Gain (loss) on sale of securities, net ........             189              34              236                2            (234)
  Gain on sale of mortgage loans ................              66              82               63               --              --
  Impairment loss on equity securities ..........              --            (183)             (80)              --              --
  Other noninterest income ......................              --              44               11               --              --
                                                         --------        --------         --------         --------        --------
Total noninterest income ........................             965             625              860              597             236
Total noninterest expense .......................           2,881           2,448            2,309            2,151           2,138
                                                         --------        --------         --------         --------        --------
Earnings before taxes on income .................           1,956           1,716            1,637              821             725
Taxes on income .................................             625             577              552              251             239
                                                         --------        --------         --------         --------        --------
Net earnings ....................................        $  1,331        $  1,139         $  1,085         $    570        $    486
                                                         ========        ========         ========         ========        ========

Basic earnings before common share ..............        $   1.74        $   1.52         $   1.44         $   0.72        $   0.56
Diluted earnings per common share ...............        $   1.72        $   1.48         $   1.42         $   0.71        $   0.56
Dividends per share .............................        $  0.225        $   0.20         $   0.18         $   0.18        $   0.18
</TABLE>


                                       4
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                               ----------------------------------------------------------
                                                                2004         2003         2002         2001         2000
                                                               ------       ------       ------       ------       ------
<S>                                                            <C>          <C>          <C>          <C>          <C>
Selected Financial Condition Data:
----------------------------------

Performance Ratios:
  Return on assets (ratio of net earnings (loss)
  to average total assets) ..............................        1.40%        1.27%        1.22%         .66%         .58%
  Interest rate spread information:
  Average during year ...................................        4.33         3.98         3.55         2.73         3.06
  End of year ...........................................        4.37         4.18         3.96         3.03         2.86
  Net interest margin(1) ................................        4.61         4.31         3.97         3.15         3.40
  Ratio of operating expense to average
  total assets ..........................................        3.03         2.72         2.58         2.49         2.54
  Return on stockholders' equity (ratio of
  net earnings (loss) to average equity) ................       12.15        11.48        12.16         6.82         5.95
  Efficiency ratio(2) ...................................       59.01        54.80        55.98        66.27        66.96

Asset Quality Ratios:
  Non-performing assets to total assets at
  end of year(3) ........................................        2.83         3.28         2.41          .61         1.39
  Allowance for losses on loans to non-performing
  loans .................................................       26.57        20.94        28.01        26.47        34.49
  Allowance for losses on loans to total
  loans .................................................         .88          .86          .83          .56          .61

Other Ratios:
  Stockholders' equity to total assets at
  end of year ...........................................       11.58        11.44        10.63         9.45         9.95
  Average stockholders' equity to average assets ........       11.51        11.04        10.04         9.68         9.71
  Average interest-earning assets to average
  interest-bearing liabilities ..........................      115.23%      114.21%      113.41%      108.98%      107.83%

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

----------

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

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

(3)   Non-performing   assets  consist  of  nonaccruing  loans,  accruing  loans
      past-due 90 or more days,  real estate  owned,  and  repossessed  consumer
      property.


                                       5
<PAGE>

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

General

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

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

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

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

      Local economic  conditions in the Bank's Mahaska and Marion County markets
have  improved  although  the  housing  market,  which has been a good  economic
engine,  is weakening.  Currently,  farm prices for both grain and livestock are
volatile,  but farmers  are not  struggling.  We are  currently  experiencing  a
decline in some  lines of retail  business  in the  Mahaska  and  Marion  County
markets.  Local economic conditions in Polk County are better and offer the Bank
a good  opportunity  to extend its lending area through the Bank's new office in
Pleasant  Hill,  Iowa.  However,  in  the  event  current  economic  and  market
conditions  worsen in the Mahaska  and Marion  County  markets,  loan demand and
existing  loans may be  affected,  which could  adversely  affect the  financial
condition and the results of operations of the Company and the Bank.

Forward-Looking Statement

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


                                       6
<PAGE>

statements,  which speak only as of the date made,  and to advise  readers  that
various factors, including regional and national economic conditions, changes in
levels of  market  interest  rates,  credit  risks of  lending  activities,  and
competitive  and  regulatory  factors,  could  affect  the  Company's  financial
performance  and could cause the Company's  actual results for future periods to
differ materially from those anticipated or projected.

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

Financial Condition

      June 30, 2004 Compared to June 30, 2003.

      Total assets increased $7.7 million, or 8.5%, to $99.0 million at June 30,
2004 from $91.3  million at June 30, 2003.  The increase in assets was primarily
attributable  to a $14.4  million  increase  in loans  receivable,  net to $79.4
million at June 30, 2004 from $65.0 million at June 30, 2003.  The $14.4 million
loan receivable,  net increase  primarily consists of increased gross commercial
business  loans of $8.6 million,  total real estate loans of $5.1  million,  and
total consumer loans of $779,000. Accompanying this increase was a $1.4 million,
or 70.0%,  increase in office  property and  equipment  due to  completion of an
extensive  remodeling of the Bank's home office and the  construction  of a bank
office in Pleasant  Hill,  Iowa which was  completed in August  2004.  Partially
offsetting  these increases were decreases in cash and cash  equivalents of $3.4
million to $1.9 million at June 30, 2004, from $5.3 million at June 30, 2003 and
a decrease in securities  available-for-sale of $4.7 million to $12.5 million at
June 30, 2004 from $17.2 million at June 30, 2003.  The decrease in cash and the
funds    received   from   sales   and   principal    payments   on   securities
available-for-sale were used primarily to fund loan originations.

      Total  liabilities  increased  $6.7 million,  or 8.3%, to $87.6 million at
June 30,  2004 from $80.9  million  at June 30,  2003,  primarily  the result of
increased deposits of $4.3 million,  or 5.8%, to $78.7 million at June 30, 2004,
from $74.4  million  at June 30,  2003.  Advances  from  Federal  Home Loan Bank
increased  $2.4 million,  or 43.5%,  with the  additional  borrowed  funds being
disbursed in loan originations.

      Stockholders' equity increased $1.02 million, or 9.8%, during fiscal 2004,
primarily  due to the retention of net earnings as retained  earnings  increased
$1.14 million,  or 15.2%.  Accompanying this increase was a decrease of $139,000
in  treasury  stock as the  Company  acquired  200 shares of  treasury  stock at
$2,600,  and distributed  10,940 shares of treasury  stock,  with a net value of
$125,000  through  exercise  of  employee  stock  options.   Accumulated   other
comprehensive gain (loss) on securities available for sale decreased $286,000 to
a loss of $138,000 from a gain of $148,000.  The decrease in market value of the
Company's  available-for-sale  portfolio is largely due to the increase in rates
negatively influencing the market value of the mortgage-backed  securities owned
by the  Bank.  Mortgage-backed  securities  at  amortized  cost are 63.5% of the
Company's  available-for-sale  portfolio.  During the fiscal year ended June 30,
2004, the Company paid cash dividends totaling  approximately $173,200 or $.2250
per share.

      June 30, 2003 Compared to June 30, 2002.

      Total assets increased $2.9 million, or 3.3%, to $91.3 million at June 30,
2003  from  $88.4  million  at  June  30,  2002.   The  increase  was  primarily
attributable  to a $5.1 million  increase in securities  available-for-sale,  to
$17.2  million at June 30, 2003 from $12.1 million at June 30, 2002, as the Bank
focused on reducing cash and cash  equivalent  balances  which were earning less
desirable returns and investing these dollars in higher yielding mortgage-backed
securities and investment grade corporate bonds.  Accompanying this increase was
a $620,400, or 45.9% increase, in office property and equipment due to extensive
remodeling of the Bank's home office and the Bank's land purchase at 1290 Copper
Creek Drive, Pleasant Hill, Iowa for the construction of a branch office.


                                       7
<PAGE>

Partially offsetting these increases was a decrease in cash and cash equivalents
of $2.8 million to $5.3 million at June 30, 2003,  from $8.1 million at June 30,
2002. Loans receivable,  net decreased slightly by $92,000,  as loan origination
volume  for  the  Bank  remains  steady,   but  sales  of  first  mortgage  loan
originations to the secondary market continue to increase.

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

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

Results of Operations

Comparison of Fiscal Years Ended June 30, 2004 and June 30, 2003.

      General.  For the fiscal year ended June 30,  2004  ("fiscal  2004"),  net
earnings increased $192,000 to $1.33 million, or $1.72 per share,  diluted, from
$1.14 million, or $1.48 per share,  diluted,  for the fiscal year ended June 30,
2003 ("fiscal  2003").  The net earnings  increase for fiscal 2004 was primarily
attributable to increased net interest  income,  both before and after provision
for losses on loans as interest paid on deposits,  largely due to reduced rates,
continued  to  decrease,   creating  an  improved  spread.  Non-interest  income
increased largely due to the absence of an impairment  adjustment in fiscal 2004
as compared to fiscal  2003 and an  increase  in gain on sale of  securities  in
fiscal  2004.  Offsetting  the  increases  in income were  non-interest  expense
increases of 17.7% for fiscal 2004 as compared to fiscal 2003  primarily  due to
increases in compensation  costs,  office property and equipment  expenses,  and
advertising.

      During fiscal 2004, the Company's  return on average  assets  ("ROAA") and
return  on  average   stockholders'   equity  ("ROAE")  was  1.40%  and  12.15%,
respectively,   compared   to  1.27%  and  11.48%  for  fiscal   2003.   Average
stockholders'  equity to  average  assets  was 11.51%  during  fiscal  year 2004
compared to 11.04% during fiscal year 2003. The Company's  dividend payout ratio
was 12.93% during fiscal 2004.

      Interest  Income.  For fiscal 2004  interest  income  decreased  $3,500 as
compared to fiscal 2003.  Interest and fees on loans increased  $71,000 to $5.18
million for fiscal 2004 from $5.11  million for fiscal 2003 as average loans for
the  period  increased  $5.3  million,  but  weighted  average  yield  on  loans
receivable  decreased 48 basis points to 7.29% for fiscal 2004 compared to 7.77%
for fiscal 2003. Other interest income decreased  $49,000,  or 71.1%, to $20,000
for fiscal 2004 compared to $69,000 for fiscal 2003.  Average  balances of other
interest-earning  assets  decreased  $3.3  million for fiscal  2004  compared to
fiscal 2003 and  weighted  average  yield on other  interest-earning  assets for
fiscal  2004  decreased  44 basis  points to .26% for fiscal  2004 from .70% for
fiscal 2003, the result of sharp decreases in interest rates paid by FHLB on the
Bank's demand and daily time accounts and stringent liquidity management leading
to decreased  balances in these lower  interest  earning  accounts.  Interest on
securities  available-for-sale also decreased for fiscal 2004 compared to fiscal
2003 by $25,000 to $602,000  from  $627,000 for fiscal  2003,  a 4.0%  decrease.
Average  balance for securities  available-for-sale  for fiscal 2004 compared to
2003  increased  $1.1  million,   but  weighted   average  yield  on  securities
available-for-sale  for the year  decreased  52 basis  points  to 4.04%  for the
fiscal year ended 2004 from 4.56% for


                                       8
<PAGE>

the fiscal year ended  2003.  The  average  rate earned on all  interest-earning
assets  decreased 22 basis points for fiscal 2004 to 6.41% from 6.63% for fiscal
2003.

      Interest expense.  Interest expense decreased $400,000, or 19.7%, to $1.63
million for fiscal  2004 from $2.03  million for fiscal  2003.  The  decrease in
interest  expense  was  predominantly  due  to  the  weighted  average  rate  on
interest-bearing  deposits  decrease of 60 basis points to 1.85% for fiscal 2004
from 2.45% for fiscal  2003.  Average  outstanding  balance of  interest-bearing
deposits  increased  $1.1  million to $72.2  million  for fiscal 2004 from $71.1
million for fiscal  2003.  Interest on advances  increased  slightly  for fiscal
2004. Average advances increased $786,000 to $6.34 million for fiscal 2004, at a
weighted  average  rate of 4.60%,  from  $5.56  million  for fiscal  2003,  at a
weighted  average rate of 5.18%.  The average rate paid on all  interest-bearing
liabilities  decreased  58 basis  points for fiscal 2004 to 2.07% from 2.65% for
fiscal 2003.

      Net interest income. Net interest income increased $397,000,  or 10.5%, to
$4.2  million for fiscal  2004  compared to $3.8  million for fiscal  2003.  The
Company's net interest  margin,  which is net interest income divided by average
interest-earning assets, increased 30 basis points for fiscal 2004 to 4.61% from
4.31% for  fiscal  2003.  The net  interest  margin  increase  is the  result of
decreased rates paid on deposits and FHLB advances  accompanied  with the slower
reduction in loan rates for fiscal 2004. The Company does not expect the current
increase in net  interest  margin to  continue as rates paid on deposits  remain
constant  or  increase in  response  to local  competition  and  recovery in the
national economy and as our  adjustable-rate  loan portfolio continues to adjust
to a  lagging  market  loan rate  index.  The  Company's  interest  rate  spread
increased  to 4.33% for fiscal 2004 from 3.98% for fiscal 2003,  also  primarily
the result of decreased  interest  paid on deposits.  The ratio of the Company's
average   interest-earning  assets  to  average   interest-bearing   liabilities
increased to 115.23% during fiscal 2004 from 114.21% during fiscal 2003.

      Provision  for  Losses on Loans.  The  provision  for losses on loans is a
result of  management's  periodic  analysis  of the  adequacy  of the  Company's
allowance  for losses on loans.  During  fiscal  2004,  the  Company  recorded a
provision  for losses on loans of $300,000  compared to a $235,800  provision in
fiscal  2003.  The Company  continues  to monitor and adjust its  allowance  for
losses on loans as  management's  analysis of its loan  portfolio  and  economic
conditions dictate. The Company believes it has taken an appropriate approach to
maintain  the  allowance  for  losses  on loans at a level  consistent  with the
Company's loss experiences and considering, among other factors, the composition
of the  Company's  loan  portfolio,  the level of the Company's  classified  and
non-performing  assets  and  their  estimated  value.  Future  additions  to the
Company's  allowance  for losses on loans and any change in the related ratio of
the allowance for losses on loans to non-performing loans are dependent upon the
economy, changes in real estate values and interest rates. In addition,  federal
regulators may require  additional  reserves as a result of their examination of
the  Company.  The  allowance  for  losses on loans  reflects  what the  Company
currently  believes is an adequate  level of reserves,  although there can be no
assurance  that future  losses will not exceed the  estimated  amounts,  thereby
adversely affecting future results of operations.

      As of June 30, 2004, the Company's  non-performing  assets,  consisting of
nonaccrual loans of $2,623,000,  and real estate owned and repossessed  consumer
property of $181,000  totaled  $2,804,000 or 2.83% of total assets,  compared to
$2,655,000 of nonaccrual loans and $343,500 of real estate owned and repossessed
consumer property,  or 3.28% of total assets as of June 30, 2003. As of June 30,
2004,  the Company's  allowance  for losses on loans was $697,000,  representing
24.9% of  non-performing  assets and .88% of net loans receivable  compared to a
$555,600  allowance for losses on loans at June 30, 2003  representing  18.5% of
non-performing  assets  and .86% of net  loans  receivable.  One-to-four  family
non-accruing  mortgage loans decreased  $458,000 as of June 30, 2004 compared to
June 30, 2003, while all other classes of non-accruing loans increased $426,000.

      Non-interest  income.  Non-interest  income increased  $340,000 for fiscal
2004 to $965,000 from $625,000 for fiscal 2003.  The increase for fiscal 2004 is
largely  attributable  to  the  recorded  $161,660  impairment  loss  on  equity
securities in fiscal 2003 and a $155,000  increase in gain on sale of securities
in fiscal 2004. Fees,


                                       9
<PAGE>

commissions,  and service charges increased by $62,000, or 9.6%, in fiscal 2004,
but gain on sale of mortgage loans decreased $16,000, or 19.7%, as the number of
loans sold to the  secondary  market began to slow  primarily  the result of the
increase in mortgage loan rates decreasing the number of loans refinanced.

      Non-interest  expense.  Non-interest expense increased $433,000 for fiscal
2004.  Compensation  and employee  benefits  expense,  the largest  component of
non-interest  expense,  increased $261,000,  or 19.3% primarily due to increased
benefit costs and the addition of employees in  preparation  for opening the new
bank office in Pleasant Hill, Iowa. Office property and equipment also increased
by $113,000 for fiscal 2004,  largely due to  increased  depreciation,  property
taxes,  technology equipment maintenance,  and office building rent. Advertising
costs  increased  $52,000,  as the Company began  promotion of the upcoming bank
office in Pleasant Hill, Iowa. Other real estate expense increased primarily the
result of loss on sale of real estate owned and repairs and maintenance costs on
foreclosed real estate properties.

      Income Tax Expense.  Income taxes  increased  $48,700 for fiscal 2004. The
income tax increase was primarily due to an increase in earnings  prior to taxes
on income.  Income tax  expense  was  reduced by low income  housing  credits of
approximately  $42,000, which will continue annually through 2005. The Company's
effective tax rate for fiscal 2004 and 2003 were 32.0% and 33.6%, respectively.

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

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

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

      Interest Income. Interest income was $5.8 million for fiscal 2003 and $6.2
million for fiscal 2002.  Interest income on loans decreased $232,000 for fiscal
2003 reflecting the slight decrease in the average  outstanding balance of loans
receivable  from $65.1  million  for fiscal 2002  compared to $65.0  million for
fiscal 2003,  and a decrease in average  yield on loans for fiscal 2003 to 7.77%
from 8.13% for fiscal 2002. Accompanying this decrease was a $73,400 decrease in
interest income on securities available-for-sale and a $41,400 decrease in other
investment  income for fiscal 2003 as compared to fiscal 2002.  Average  balance
for securities available-for-sale for fiscal 2003 were $13.7 million compared to
$13.0   million   for  fiscal  2002  and  the   average   yield  on   securities
available-for-sale  for fiscal 2003 was 4.56% compared to 5.40% for fiscal 2002.
Other interest  earning assets averaged $7.5 million and yielded .71% for fiscal
2003  compared to $6.9 million and 1.37% for fiscal 2002.  The average  yield on
all  interest-earning  assets  decreased to 6.63% during  fiscal 2003 from 7.15%
during fiscal 2002; a 52 basis point decline.

      Interest Expense. Interest expense decreased $704,000 to $2.0 million for
fiscal 2003 compared to $2.7 million for fiscal 2002. The decrease in interest
expense was primarily due to a 98 basis point decrease in the weighted average
rate paid on interest-bearing deposits during fiscal 2003 as compared to fiscal
2002. The


                                       10
<PAGE>

weighted average rate paid on  interest-bearing  deposits decreased to 2.45% for
fiscal 2003  compared to 3.43% for fiscal 2002.  Interest on deposits  decreased
$621,000,  or 26.3% for fiscal  2003.  Contributing  to the decrease in interest
expense was a decrease in interest on advances.  Interest on advances  decreased
$83,000,  or 22.4%,  to $288,000 for fiscal 2003 compared to $371,000 for fiscal
2002.  The average rate paid on all  interest-bearing  liabilities  decreased 95
basis points to 2.65% during fiscal 2003 from 3.60% during fiscal 2002.

         Net Interest Income. Net interest income increased $357,500,  or 10.5%,
to $3.8 million in fiscal 2003 from $3.4 in fiscal 2002, primarily the result of
decreased  interest paid on deposits  being greater than the decreased  earnings
for  interest  on loans  and  interest  on  securities  available-for-sale.  The
Company's net interest margin increased 34 basis points to 4.31% for fiscal 2003
as compared to 3.97% for fiscal  2002.  During this same period,  the  Company's
interest  rate spread  increased  to 3.98% for fiscal 2003 from 3.55% for fiscal
2002,  also in response to decreased  interest paid on deposits  which were more
reactive to the markets declining  interest rates than the Bank's  variable-rate
loan portfolio which follows a lagging index. The ratio of the Company's average
interest-earning  assets to average  interest-bearing  liabilities  increased to
114.21% during fiscal 2003 from 113.41% during fiscal 2002.

        Provision  for Losses on Loans.  The  provision for losses on loans is a
result of  management's  periodic  analysis  of the  adequacy  of the  Company's
allowance  for losses on loans.  During  fiscal  2003,  the  Company  recorded a
provision  for losses on loans of $235,800  compared to a $331,500  provision in
fiscal  2002.  The Company  continues  to monitor and adjust its  allowance  for
losses on loans as  management's  analysis of its loan  portfolio  and  economic
conditions dictate. The Company believes it has taken an appropriate approach to
maintain  the  allowance  for  losses  on loans at a level  consistent  with the
Company's loss experiences and considering, among other factors, the composition
of the  Company's  loan  portfolio,  the level of the Company's  classified  and
non-performing  assets  and  their  estimated  value.  Future  additions  to the
Company's  allowance  for losses on loans and any change in the related ratio of
the allowance for losses on loans to non-performing loans are dependent upon the
economy, changes in real estate values and interest rates. In addition,  federal
regulators may require  additional  reserves as a result of their examination of
the  Company.  The  allowance  for  losses on loans  reflects  what the  Company
currently  believes is an adequate  level of reserves,  although there can be no
assurance  that future  losses will not exceed the  estimated  amounts,  thereby
adversely affecting future results of operations.

      As of June 30, 2003 and June 30, 2002 the  Company's  allowance for losses
on loans was  $556,000 and  $537,000,  respectively.  As of June 30,  2003,  the
Company's non-performing assets, consisting of nonaccruing loans, accruing loans
90 days or more delinquent, real estate owned and repossessed consumer property,
totaled  $2,998,000 or 3.28% of total assets  compared to $2,128,000 or 2.41% of
total assets as of June 30, 2002. The increase in non-performing  assets related
primarily to a $737,000 increase in non-accruing  loans past-due 90 or more days
and a $133,000  increase  in  repossessed  consumer  property  and real  estate.
One-to-four  family  non-accruing  mortgage loans  increased  $556,000 while all
other classes of non-accruing loans increased $181,000.

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

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


                                       11
<PAGE>

      Income Tax Expense.  Income taxes increased $25,000 to $576,900 for fiscal
2003 from  $551,900  for fiscal  2002.  The  increase  was  primarily  due to an
increase in earnings prior to taxes on income. Income tax expense was reduced by
low  income  housing  credits of  approximately  $42,000,  which  will  continue
annually  through  2005.  The  Company's  effective tax rate for fiscal 2003 was
33.6%.


                                       12
<PAGE>

Average Balances, Interest Rates and Yields

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

<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                        -------------------------------------------------------------------------------------------
                                                       2004                           2003                           2002
                                        ------------------------------  ----------------------------   ----------------------------
                                          Average    Interest             Average   Interest             Average   Interest
                                        Outstanding   Earned/   Yield/  Outstanding  Earned/  Yield/   Outstanding  Earned/  Yield/
                                          Balance     Paid       Rate     Balance     Paid     Rate      Balance     Paid     Rate
                                        -----------  --------   ------  -----------  -------  ------   ----------- --------  ------
                                                                            (Dollars in Thousands)
<S>                                       <C>        <C>         <C>      <C>        <C>       <C>       <C>        <C>        <C>
Interest-Earning Assets:
 Loans receivable(1) ..................   $71,011    $ 5,179     7.29%    $65,741    $ 5,108   7.77%     $65,655    $ 5,340    8.13%
 Securities available-for-sale ........    14,889        602     4.04      13,773        628   4.56       12,993        701    5.40
 Other interest-bearing assets ........     4,234         11      .26       7,525         53    .70        6,894         95    1.38
 FHLB stock ...........................       417          9     2.16         509         16   3.14          489         16    3.27
                                          -------    -------              -------    -------             -------    -------
  Total interest-earning assets(1) ....    90,551      5,801     6.41      87,548      5,805   6.63       86,031      6,152    7.15
                                          -------    -------              -------    -------             -------    -------

Interest-Bearing Liabilities:
 Savings deposits .....................    33,356        424     1.27      32,625        542   1.61       29,036        720    2.48
 Money market deposits ................       236         --       --         314          2    .64          363          5    1.38
 Demand and NOW deposits ..............     9,045         53      .59       7,655         61    .80        6,666         96    1.44
 Certificates of deposit ..............    29,604        860     2.90      30,505      1,137   3.73       32,824      1,542    4.70
 FHLB Advances ........................     6,343        292     4.60       5,558        288   5.18        6,966        371    5.33
                                          -------    -------              -------    -------             -------    -------
  Total interest-bearing liabilities ..    78,584      1,629     2.07      76,657      2,030   2.65       75,855      2,734    3.60
                                          -------    -------              -------    -------             -------    -------

Net interest income ...................              $ 4,172                         $ 3,775                        $ 3,418
                                                     =======                         =======                        =======
Net interest rate spread ..............                          4.33%                         3.98%                           3.55%
                                                                 ====                          ====                            ====
Net interest-earning assets ...........   $11,967                         $10,891                        $10,176
                                          =======                         =======                        =======
Net interest margin(2) ................                          4.61%                         4.31%                           3.97%
                                                                 ====                          ====                            ====

Average  interest-earning assets to
average interest-bearing liabilities ..               115.23%                         114.21%                        113.42%
                                                     =======                         =======                        =======
</TABLE>

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

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


                                       13
<PAGE>

Rate/Volume Analysis of the Net Interest Income

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

<TABLE>
<CAPTION>
                                                                                 Year Ended June 30,
                                                         ------------------------------------------------------------------------
                                                                  2004 vs. 2003                           2003 vs. 2002
                                                         --------------------------------     -----------------------------------
                                                             Increase                              Increase
                                                            (Decrease)                            (Decrease)
                                                              Due to                                Due to
                                                         --------------------                 --------------------
                                                                                 Total                                   Total
                                                                                Increase                                Increase
                                                         Volume        Rate    (Decrease)     Volume         Rate      (Decrease)
                                                         ------      --------  ----------     ------      ---------    ----------
                                                                                    (In Thousands)
<S>                                                      <C>          <C>         <C>          <C>          <C>          <C>
Interest-earning assets:
  Loans receivable ...............................       $ 115        $ (44)      $  71        $  (8)       $(224)       $(232)
  Securities available-for-sale ..................         (19)          (7)        (26)        (116)          43          (73)
  Other interest-earning assets ..................         (32)         (10)        (42)         (12)         (30)         (42)
  FHLB Stock .....................................          (1)          (6)         (7)          --           --           --
                                                         -----        -----       -----        -----        -----        -----

     Total interest-earning assets ...............       $  63        $ (67)      $  (4)       $(136)       $(211)       $(347)
                                                         =====        =====       =====        =====        =====        =====

Interest-bearing liabilities:
  Savings deposits ...............................          74         (192)       (118)          21         (199)        (178)
  Money market deposits ..........................          --           (2)         (2)          (1)          (2)          (3)
  Demand and NOW deposits ........................          (5)          (3)         (8)           6          (41)         (35)
  Certificates of deposits .......................         (11)        (266)       (277)          46         (451)        (405)
  FHLB advances ..................................           8           (4)          4          (83)          --          (83)
                                                         -----        -----       -----        -----        -----        -----

     Total interest-bearing liabilities ..........       $  66        $(467)      $(401)       $ (11)       $(693)       $(704)
                                                         =====        =====       =====        =====        =====        =====

Net interest income ..............................                                $ 397                                  $ 357
                                                                                  =====                                  =====
</TABLE>


                                       14
<PAGE>

Interest Rate Spread

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

<TABLE>
<CAPTION>
                                                                                   At June 30,
                                                                       ----------------------------------
                                                                       2004           2003          2002
                                                                       ----           ----          ----
<S>                                                                    <C>            <C>           <C>
             Weighted average yield on:

               Loans receivable, net(1)....................            6.95%          7.60%         7.92%
               Securities available-for-sale...............            4.02           4.45          5.27
               Other interest-earning assets...............             .07            .09           .86
               FHLB stock..................................            1.79           3.00          3.00
                  Combined weighted average yield on
                  interest-earning assets..................            6.36           6.52          6.92

             Weighted average rate paid on:

               Savings deposits............................            1.25           1.41          1.99
               Money market deposits.......................              --             --           .97
               Demand and NOW deposits.....................             .63            .54          1.07
               Certificates of Deposit.....................            2.77           3.30          4.06
               FHLB advances...............................            4.05           5.21          5.21
                  Combined weighted average rate paid
                  on interest-bearing liabilities..........            1.99           2.34          2.96

               Spread......................................            4.37%          4.18%         3.96%
</TABLE>

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

Asset/Liability Management

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

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


                                       15
<PAGE>

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

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

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

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

      Under OTS guidelines, interest rate risk is measured using an NPV model to
estimate a thrift's  market  value of portfolio to equity and the impact on that
estimate of an adverse 200 basis point shift in interest rates. Unless otherwise
directed by the OTS Regional  Director,  institutions below $1 billion in assets
may usually rely on the quarterly NPV estimates  produced by the OTS.  Utilizing
this  measuring  concept,  a deduction  to  risk-based  capital  would have been
required as of June 30,  2004 if the  regulation  applied to the Bank.  However,
even if such deduction was applied,  the Bank would still meet their  risk-based
capital requirement under current regulatory guidelines.

      Presented below is an analysis of the Bank's interest rate risk as of June
30, 2004, as measured by changes in NPV for instantaneous and sustained parallel
shifts in the yield curve,  in 100 basis point  increments,  up 300 basis points
and down 100 basis points and compared to Board policy  limits and in accordance
with OTS regulations.  Interest rate risk exposure  typically has been presented
for changes of interest  rates of up and down 300 basis  points;  however due to
the abnormally low prevailing  interest rate  environment,  the OTS is currently
not providing  NPV change  estimates  below minus 100 basis points.  Such limits
have been  established  with  consideration of the dollar impact of various rate
changes  and the Bank's  strong  capital  position.  Management  reviews the OTS
measurements  on a quarterly  basis.  At June 30, 2004, the Bank's interest rate
risk was within the Board's prescribed guidelines.


                                       16
<PAGE>

                                                          At June 30,
              Change in            Board Limit               2004
            Interest Rate       (min NPV ratios)          -----------
           (Basis Points)           % Change               % Change
           --------------       ---------------           -----------
                 +300                5.00%                   13.93%
                 +200                6.00                    14.54
                 +100                6.75                    14.98
                    0                6.75                    15.30
                 -100                6.75                    15.33

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

Critical Accounting Policies

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

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

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

Liquidity and Capital Resources

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


                                       17
<PAGE>

      The Company  principally  uses its  liquidity  resources  to meet  ongoing
commitments,  to fund maturing  certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments,  to maintain liquidity,
and to meet other  operating  needs.  At June 30,  2004,  the  Company  had $3.6
million  of  loan  commitments.  The  Company  anticipates  that  it  will  have
sufficient  funds available to meet  outstanding  loan  commitments.  Management
believes  that loan  repayments  and other  sources of funds will be adequate to
meet and exceed the Bank's foreseeable short-term and long-term liquidity needs.

      Certificates of deposit  scheduled to mature in a year or less at June 30,
2004 totaled  $17.0  million or 57.3% of the  Company's  total  certificates  of
deposit. Based on historical experience,  management believes that a significant
portion  of  such  deposits  will  remain  with  the  Company.  There  can be no
assurance,  however, that the Company will retain all such deposits. At June 30,
2004, the Company had  outstanding  borrowings of $7.96 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $17.4 million.

      The primary investing activities of the Company include the origination of
loans and the purchase of  mortgage-backed  securities.  At June 30, 2004, these
assets accounted for over 92.8% of the Company's total assets.  Such origination
and  purchases  are  funded  primarily  from  loan  repayments,   repayments  of
mortgage-backed and investment  securities,  deposit growth, FHLB advances,  and
net income.

      At June 30, 2004,  the Bank had tangible and core capital of $9.4 million,
or 9.6% of adjusted total assets,  which was approximately $7.9 million and $5.5
million above the minimum requirements of 1.5% and 4.0%,  respectively.  At June
30, 2004, the Bank had total risk-based capital of $10.1 million (including $9.4
million in core  capital),  or 13.7% of  risk-weighted  assets of $73.5 million.
This amount was $4.2 million above the 8.0% requirement in effect on that date.

Impact of Inflation and Changing Prices

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


                                       18
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIEs

                        Consolidated Financial Statements

                             June 30, 2004 and 2003

                   (With Independent Auditors' Report Thereon)


                                       19
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and
Shareholders of Horizon Financial Services Corporation:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Horizon
Financial  Services  Corporation and  subsidiaries  (the Company) as of June 30,
2004 and 2003, and the related consolidated statements of operations, changes in
stockholders' equity and other comprehensive  income, and cash flows for each of
the years in the  three-year  period  ended June 30,  2004.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Horizon Financial
Services  Corporation  and  subsidiaries  as of June 30, 2004 and 2003,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period  ended  June 30,  2004,  in  conformity  with U.S.  generally
accepted accounting principles.


                                  /s/ KPMG LLP

KPMG LLP
Des Moines, Iowa
August 2, 2004


                                       20
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                           Consolidated Balance Sheets

                             June 30, 2004 and 2003

<TABLE>
<CAPTION>
                                    Assets                                    2004               2003
                                                                          ------------      ------------
<S>                                                                       <C>                 <C>
Cash and cash equivalents                                                 $  1,863,244         5,303,912
Securities available-for-sale (note 2)                                      12,494,069        17,176,190
Loans receivable, net (notes 3 and 4)                                       79,378,663        65,006,810
Real estate (note 5)                                                           437,022           638,658
Stock in Federal Home Loan Bank, at cost                                       464,000           509,200
Office property and equipment, net (note 6)                                  3,352,387         1,971,871
Accrued interest receivable (note 7)                                           722,273           567,301
Deferred tax assets (note 10)                                                  221,200            60,000
Accrued income taxes receivable                                                 18,792            42,282
Prepaid expenses and other assets                                               86,196            46,109
                                                                          ------------      ------------
                 Total assets                                             $ 99,037,846        91,322,333
                                                                          ============      ============
                     Liabilities and Stockholders' Equity
Deposits (note 8)                                                         $ 78,723,389        74,422,752
Advances from Federal Home Loan Bank (note 9)                                7,957,500         5,545,115
Advance payments by borrowers for taxes and insurance                          353,802           347,265
Accrued expenses and other liabilities                                         538,353           563,151
                                                                          ------------      ------------
                 Total liabilities                                          87,573,044        80,878,283
                                                                          ------------      ------------
Stockholders' equity (note 12):
     Preferred stock, $0.01 par value. Authorized 250,000 shares;
        none issued                                                                 --                --
     Common stock, $0.01 par value. Authorized 1,500,000 shares;
        1,046,198 shares issued                                                 10,462            10,462
     Additional paid-in capital                                              5,052,022         5,025,598
     Retained earnings, substantially restricted                             8,639,455         7,498,305
     Treasury stock, at cost (274,727 and 297,267 shares in 2004
        and 2003, respectively)                                             (2,099,098)       (2,237,884)
     Accumulated other comprehensive (loss) gain - net
        unrealized (loss) gain on securities available-for-sale               (138,039)          147,569
                                                                          ------------      ------------
                 Total stockholders' equity                                 11,464,802        10,444,050
Commitments and contingencies (notes 3 and 14)
                                                                          ------------      ------------
                 Total liabilities and stockholders' equity               $ 99,037,846        91,322,333
                                                                          ============      ============
</TABLE>

See accompanying notes to consolidated financial statements


                                       21
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                     Consolidated Statements of Operations

                    Years ended June 30, 2004, 2003, and 2002

<TABLE>
<CAPTION>
                                                                         2004               2003               2002
                                                                      ------------      ------------       ------------
<S>                                                                   <C>                  <C>                <C>
Interest income:
    Loans                                                             $  5,178,629         5,107,922          5,339,939
    Investment securities available-for-sale                               602,485           627,615            701,044
    Other interest income                                                   19,997            69,093            110,511
                                                                      ------------      ------------       ------------
                Total interest income                                    5,801,111         5,804,630          6,151,494
                                                                      ------------      ------------       ------------
Interest expense:
    Deposits (note 8)                                                    1,337,102         1,741,930          2,363,078
    Advances from Federal Home Loan Bank (note 9)                          291,779           287,610            370,855
                                                                      ------------      ------------       ------------
                Total interest expense                                   1,628,881         2,029,540          2,733,933
                                                                      ------------      ------------       ------------
                Net interest income                                      4,172,230         3,775,090          3,417,561

Provision for losses on loans (note 4)                                     300,000           235,800            331,500
                                                                      ------------      ------------       ------------
                Net interest income after provision
                   for losses on loans                                   3,872,230         3,539,290          3,086,061
                                                                      ------------      ------------       ------------
Noninterest income:
    Fees, service charges, and commissions                                 710,153           647,901            629,987
    Gain on sale of securities, net (note 2)                               188,704            33,521            236,384
    Gain on sale of mortgage loans                                          65,946            82,111             63,574
    Impairment loss on equity securities (note 2)                               --          (182,702)           (80,360)
    Other                                                                       --            43,874             11,084
                                                                      ------------      ------------       ------------
                Total noninterest income                                   964,803           624,705            860,669
                                                                      ------------      ------------       ------------
Noninterest expense:
    Compensation, payroll taxes, and employee
       benefits (note 11)                                                1,610,316         1,349,422          1,283,858
    Advertising                                                            138,923            86,479             81,339
    Office property and equipment                                          518,929           405,657            302,982
    Federal insurance premiums and special
       assessments                                                          11,652            12,329             23,771
    Data processing services                                               211,573           217,280            195,119
    Other real estate                                                       61,084            32,298             47,243
    Other                                                                  328,289           344,520            375,072
                                                                      ------------      ------------       ------------
                Total noninterest expense                                2,880,766         2,447,985          2,309,384
                                                                      ------------      ------------       ------------
                Earnings before taxes                                    1,956,267         1,716,010          1,637,346

Taxes (note 10)                                                            625,600           576,900            551,900
                                                                      ------------      ------------       ------------
                Net earnings                                          $  1,330,667         1,139,110          1,085,446
                                                                      ============      ============       ============
Basic earnings per common share                                       $       1.74              1.52               1.44
Diluted earnings per common share                                             1.72              1.48               1.42
</TABLE>

See accompanying notes to consolidated financial statements.


                                       22
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

         Consolidated Statements of Changes in Stockholders' Equity and
                              Comprehensive Income

                    Years ended June 30, 2004, 2003, and 2002

<TABLE>
<CAPTION>
                                                                                       Additional
                                                           Preferred      Common         paid-in       Retained
                                                             stock         stock         capital       earnings
                                                          ----------    -----------    -----------    -----------
<S>                                                       <C>                <C>         <C>            <C>
Balance at June 30, 2001                                  $       --         10,462      5,022,511      5,565,793
                                                          ----------    -----------    -----------    -----------
Comprehensive income:
    Net earnings                                                  --             --             --      1,085,446
    Unrealized gains on securities available-for-sale             --             --             --             --
    Less reclassification adjustment for net realized
      gains included in net income, net of tax                    --             --             --             --
                                                          ----------    -----------    -----------    -----------
             Total comprehensive income                           --             --             --      1,085,446
Dividends declared ($0.18 per share)                              --             --             --       (135,264)
Stock options exercised                                           --             --          3,087           (645)
                                                          ----------    -----------    -----------    -----------
Balance at June 30, 2002                                          --         10,462      5,025,598      6,515,330
                                                          ----------    -----------    -----------    -----------
Comprehensive income:
    Net earnings                                                  --             --             --      1,139,110
    Unrealized gains on securities available-for-sale             --             --             --             --
    Less reclassification adjustment for net realized
      losses included in net income, net of tax                   --             --             --             --
                                                          ----------    -----------    -----------    -----------
             Total comprehensive income                           --             --             --      1,139,110
Dividends declared ($0.2025 per share)                            --             --             --       (152,277)
Treasury stock acquired                                           --             --             --             --
Stock options exercised                                           --             --             --         (3,858)
                                                          ----------    -----------    -----------    -----------
Balance at June 30, 2003                                          --         10,462      5,025,598      7,498,305
                                                          ----------    -----------    -----------    -----------
Comprehensive income:
    Net earnings                                                  --             --             --      1,330,667
    Unrealized losses on securities available-for-sale            --             --             --             --
    Less reclassification adjustment for net realized
      gains included in net income, net of tax                    --             --             --             --
                                                          ----------    -----------    -----------    -----------
             Total comprehensive income                           --             --             --      1,330,667
Dividends declared ($.2250 per share)                             --             --             --       (173,200)
Treasury stock acquired                                           --             --             --             --
Stock options exercised                                           --             --         26,424        (16,317)
                                                          ----------    -----------    -----------    -----------
Balance at June 30, 2004                                  $       --         10,462      5,052,022      8,639,455
                                                          ==========    ===========    ===========    ===========

<CAPTION>
                                                                                 Net
                                                                             unrealized
                                                                           gain (loss) on
                                                                              securities
                                                              Treasury        available-
                                                                stock          for-sale         Total
                                                             -----------   ---------------   -----------
<S>                                                           <C>                <C>           <C>
Balance at June 30, 2001                                      (2,129,894)        (22,686)      8,446,186
                                                             -----------     -----------     -----------
Comprehensive income:
    Net earnings                                                      --              --       1,085,446
    Unrealized gains on securities available-for-sale                 --          92,041          92,041
    Less reclassification adjustment for net realized
      gains included in net income, net of tax                        --         (97,827)        (97,827)
                                                             -----------     -----------     -----------
             Total comprehensive income                               --          (5,786)      1,079,660
Dividends declared ($0.18 per share)                                  --              --        (135,264)
Stock options exercised                                           10,428              --          12,870
                                                             -----------     -----------     -----------
Balance at June 30, 2002                                      (2,119,466)        (28,472)      9,403,452
                                                             -----------     -----------     -----------
Comprehensive income:
    Net earnings                                                      --              --       1,139,110
    Unrealized gains on securities available-for-sale                 --          82,505          82,505
    Less reclassification adjustment for net realized
      losses included in net income, net of tax                       --          93,536          93,536
                                                             -----------     -----------     -----------
             Total comprehensive income                               --         176,041       1,315,151
Dividends declared ($0.2025 per share)                                --              --        (152,277)
Treasury stock acquired                                         (184,448)             --        (184,448)
Stock options exercised                                           66,030              --          62,172
                                                             -----------     -----------     -----------
Balance at June 30, 2003                                      (2,237,884)        147,569      10,444,050
                                                             -----------     -----------     -----------
Comprehensive income:
    Net earnings                                                      --              --       1,330,667
    Unrealized losses on securities available-for-sale                --        (167,291)       (167,291)
    Less reclassification adjustment for net realized
      gains included in net income, net of tax                        --        (118,317)       (118,317)
                                                             -----------     -----------     -----------
             Total comprehensive income                               --        (285,608)      1,045,059
Dividends declared ($.2250 per share)                                 --              --        (173,200)
Treasury stock acquired                                           (2,600)             --          (2,600)
Stock options exercised                                          141,386              --         151,493
                                                             -----------     -----------     -----------
Balance at June 30, 2004                                      (2,099,098)       (138,039)     11,464,802
                                                             ===========     ===========     ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       23
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                    Years ended June 30, 2004, 2003, and 2002

<TABLE>
<CAPTION>
                                                                                2004             2003             2002
                                                                            ------------     ------------     ------------
<S>                                                                         <C>               <C>              <C>
Cash flows from operating activities:
    Net earnings                                                            $  1,330,667        1,139,110        1,085,446
    Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation                                                            231,899          171,986          128,940
         Amortization of fees, premiums, and accretion of discounts, net         131,614           90,119           68,466
         Provision for losses on loans                                           300,000          235,800          331,500
         Loans originated for sale                                           (12,256,795)     (10,933,786)      (9,709,045)
         Proceeds on sales of loans                                           12,452,070       10,501,709       11,118,771
         Tax benefit from exercise of stock options                               26,424               --            3,087
         Gain on sale of securities                                             (188,704)         (33,521)        (236,384)
         Impairment losses on securities                                              --          182,702           80,360
         Gain on sale of mortgage loans                                          (65,946)         (82,111)         (63,574)
         Loss on disposal or sale of fixed assets                                     --            8,345              914
         Reinvested dividends                                                    (80,027)         (43,607)         (14,718)
         (Increase) decrease in accrued interest receivable                     (154,972)          19,833           95,049
         Increase (decrease) in accrued taxes receivable/payable                  23,515         (672,754)         302,005
         Deferred taxes                                                           10,000           46,950         (123,000)
         Other, net                                                              (61,670)          85,084         (236,328)
                                                                            ------------     ------------     ------------
              Net cash provided by operating activities                        1,698,075          715,859        2,831,489
                                                                            ------------     ------------     ------------
Cash flows from investing activities:
    Securities available-for-sale:
      Purchases                                                               (4,712,630)     (11,634,353)      (8,224,359)
      Proceeds from sale                                                       4,163,567        4,919,729        7,771,215
      Proceeds from maturity and principal collected                           4,911,468        1,709,921        3,985,189
    Loans to customers, net                                                  (15,012,040)          (4,661)      (1,632,521)
    Proceeds from sale of real estate                                            415,163          227,181          143,971
    Investment in real estate                                                     (5,884)         (95,854)              --
    Redemption of Federal Home Loan Bank stock                                    45,200               --               --
    Purchases of Federal Home Loan Bank stock                                         --               --          (29,100)
    Purchases of office property and equipment                                (1,612,415)        (800,716)        (227,599)
                                                                            ------------     ------------     ------------
              Net cash (used in) provided by investing activities            (11,807,571)      (5,678,753)       1,786,796
                                                                            ------------     ------------     ------------
Cash flows from financing activities:
    Increase in deposits                                                       4,300,637        2,469,057        2,081,769
    Increase (decrease) in advance payments by borrowers for
      taxes and insurance                                                          6,537          (25,882)         (20,403)
    Proceeds from advances from Federal Home Loan Bank                         3,757,500               --               --
    Principal payments on advances from Federal Home Loan Bank                (1,345,115)         (26,382)      (4,021,130)
    Payment of dividends                                                        (173,200)        (152,277)        (135,264)
    Exercise of stock options                                                    125,069           62,172            9,783
    Treasury stock acquired                                                       (2,600)        (184,448)              --
                                                                            ------------     ------------     ------------
              Net cash provided by (used in) financing activities              6,668,828        2,142,240       (2,085,245)
                                                                            ------------     ------------     ------------
              Net (decrease) increase in cash and cash equivalents            (3,440,668)      (2,820,654)       2,533,040

Cash and cash equivalents at beginning of year                                 5,303,912        8,124,566        5,591,526
                                                                            ------------     ------------     ------------
Cash and cash equivalents at end of year                                    $  1,863,244        5,303,912        8,124,566
                                                                            ============     ============     ============
Supplemental  disclosures  of cash flow  information:
    Cash paid during the year for:
      Interest                                                              $  1,671,132        2,063,726        3,046,638
      Taxes                                                                      564,651        1,073,300          372,810
    Noncash investing and financing activities:
      Net transfers from loans to real estate                                    210,858          375,034          301,788
</TABLE>

See accompanying notes to consolidated financial statements.


                                       24
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

(1)   Summary of Significant Accounting Policies

      (a)   Description of the Business and Concentration of Credit

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

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

            In April 2003, the Bank opened a mortgage loan origination office in
            Pleasant Hill, Iowa, which serves Polk County and surrounding areas.
            The Bank has also  received  approval  from  the  Office  of  Thrift
            Supervision  to establish a retail  banking office in Pleasant Hill,
            Iowa, which is scheduled to open in August 2004.

      (b)   Consolidation and Basis of Presentation

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

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

      (c)   Cash and Cash Equivalents

            For purposes of the statements of cash flows, the Company  considers
            all short-term  investments  with a maturity of three months or less
            at  date  of  purchase  to  be  cash  equivalents.   Cash  and  cash
            equivalents  include  interest-earning  deposits of  $1,223,587  and
            $4,627,783 at June 30, 2004 and 2003, respectively.


                                       25

                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      (d)   Earnings Per Share

            Basic  earnings  per  share is  determined  using net  earnings  and
            weighted  average common shares  outstanding.  Diluted  earnings per
            share is computed by dividing net  earnings by the weighted  average
            common  shares,  increased  by  assumed  incremental  common  shares
            issued.  Amounts  used in the  determination  of basic  and  diluted
            earnings per share for the years ended June 30, 2004, 2003, and 2002
            are shown in table below.

<TABLE>
<CAPTION>
                                                   2004          2003           2002
                                                ----------    ----------    ----------
<S>                                             <C>            <C>           <C>
            Net earnings                        $1,330,667     1,139,110     1,085,546
                                                ==========    ==========    ==========

                  Weighted average common
                    shares - basic                 766,282       751,414       751,495

            Assumed incremental common
              shares issued upon exercise of
              stock options                          6,591        18,054        13,657
                                                ----------    ----------    ----------

                  Weighted average common
                    shares - diluted               772,873       769,468       765,152
                                                ==========    ==========    ==========
</TABLE>

      (e)   Securities Available-for-Sale

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

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

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


                                       26
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      (f)   Allowance for Losses on Loans

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

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

      (g)   Loans Receivable

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

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

      (h)   Loan Origination Fees and Related Costs

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

      (i)   Real Estate

            Investment in real estate represents a limited partnership  interest
            in a low income  housing  apartment  complex  and a 50%  partnership
            interest in a retail  mall.  The  investments  are valued  using the
            equity  method and  adjusted  for earnings and losses of the limited
            partnerships.

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


                                       27
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      (j)   Financial Instruments with Off-balance Sheet Risk

            In the normal course of business to meet the financing  needs of its
            customers,  the  Bank  is a  party  to  financial  instruments  with
            off-balance sheet risk, which include  commitments to extend credit.
            The Bank's exposure to credit loss in the event of nonperformance by
            the other party to the  commitments  to extend credit is represented
            by the contractual  amount of those  instruments.  The Bank uses the
            same credit policies in making commitments as it does for on balance
            sheet instruments.

            Commitments  to extend credit are  agreements to lend to a customer,
            as long as there is no violation of any  conditions  established  in
            the contract.  Commitments  generally have fixed expiration dates or
            other  termination  clauses and may require  payment of a fee. Since
            many of the  commitments  are expected to expire without being drawn
            upon,  the total  commitment  amounts do not  necessarily  represent
            future  cash  requirements.   Each  customer's  creditworthiness  is
            evaluated  on  a  case-by-case   basis.  The  amount  of  collateral
            obtained,  if deemed necessary by the Bank, upon extension of credit
            is based on management's credit evaluation of the counterparty.

      (k)   Office Property and Equipment

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

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

      (l)   Treasury Stock

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

      (m)   Taxes on Income

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

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


                                       28
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

            or settled.  The effect on deferred tax assets and  liabilities of a
            change in tax rates is  recognized  in  income  in the  period  that
            includes the enactment date.

      (n)   Stock Option Plan

            The Company has adopted the  provisions  of  Statement  of Financial
            Accounting  Standards  (SFAS) No. 123,  Accounting  for  Stock-Based
            Compensation,  which  permits  entities to recognize as expense over
            the vesting period the fair value of all  stock-based  awards on the
            date of  grant.  The  Company  has made no option  grants  since the
            adoption of SFAS No. 123.

      (o)   Fair Value of Financial Instruments

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

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

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

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

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

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

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

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


                                       29
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

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

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

      (p)   Effect of New Accounting Standards

            In January 2003,  the Financial  Accounting  Standards  Board (FASB)
            issued  Interpretation  No. 46,  Consolidation of Variable  Interest
            Entities  (FIN 46)  which  provides  guidance  on  consolidation  of
            variable interest entities. In December 2003, the FASB issued FIN 46
            (Revised  2003)  which  deferred  the  effective  date of FIN 46 for
            certain  variable  interest  entities  (i.e.,   non-special  purpose
            entities)  until the first  interim or annual  period  ending  after
            March 15, 2004.  The adoption of the  provisions  of FIN 46 (Revised
            2003) did not have a material  effect on the Company's  consolidated
            results of operations or financial position.

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

            In May 2003,  the FASB issued SFAS No. 150,  Accounting  for Certain
            Financial  Instruments with  Characteristics of both Liabilities and
            Equity,  SFAS No.150  requires  issuers of financial  instruments to
            classify as liabilities certain freestanding  financial  instruments
            that embody  obligations  for the issuer.  SFAS No.150 was effective
            for all freestanding  financial instruments entered into or modified
            after May 31, 2003 and was  otherwise  effective at the beginning of
            the first interim period  beginning  after June 15, 2003. On October
            29,  2003,  the FASB  voted to defer for an  indefinite  period  the
            application  of the  guidance  in  SFAS  No.150  to  non-controlling
            interests that are classified as equity in the financial  statements
            of a subsidiary but


                                       30
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

            would  be  classified  as a  liability  on  the  parent's  financial
            statements. The adoption of the sections of this Statement that have
            not been deferred did not have a significant impact on the Company's
            financial  condition  or results of  operations.  The section  noted
            above that has been deferred  indefinitely is not expected to have a
            material impact on the Company's  financial  condition or results of
            operations.

            On March 9, 2004, the SEC issued Staff  Accounting  Bulleting  (SAB)
            No. 105,  Application of Accounting  Principles to Loan Commitments.
            SAB  105  summarizes  the  views  of the  SEC  staff  regarding  the
            application  of generally  accepted  accounting  principles  to loan
            commitments  accounted for as derivative  instruments.  SAB 105 will
            act to  significantly  limit  opportunities  to  recognize  an asset
            related to a commitment  to  originate a mortgage  loan that will be
            held for  sale  prior to  funding  the  loan.  SAB 105  pertains  to
            recognizing and disclosing the loan commitments and is effective for
            commitments to originate mortgage loans to be held for sale that are
            entered  into  after  March  31,  2004.  The  Company   adopted  the
            provisions of SAB 105 beginning  April 1, 2004.  Adoption of SAB 105
            did not have a material impact on the Company's  financial  position
            or results of operations.


                                       31
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

(2)   Securities Available-for-sale

      Securities available-for-sale at June 30, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                                 Gross           Gross
                                                Amortized     unrealized      unrealized
                   Description                     Cost          gains          losses        Fair value
      ------------------------------------     -----------    -----------     -----------     -----------
<S>                                            <C>                <C>               <C>        <C>
      2004:
          Small Business Administration
            Guaranteed loan participation
            certificates                       $   348,878         15,063              --         363,941
          Corporate bonds                        1,550,045          3,742          (2,728)      1,551,059
          Mortgage-backed securities             8,082,990          8,242        (184,887)      7,906,345
          FHLB Bonds                               500,000             --          (5,296)        494,704
          Mutual funds                           1,361,071             --              --       1,361,071
          FNMA Preferred Stock                     500,000             --          (1,123)        498,877
          Equity securities                        372,324          3,750         (58,002)        318,072
                                               -----------    -----------     -----------     -----------

                                               $12,715,308         30,797        (252,036)     12,494,069
                                               ===========    ===========     ===========     ===========
      2003:
          Small Business Administration
            Guaranteed loan participation
            certificates loan participation
            certificates                       $   593,081         30,075              --         623,156
          Corporate bonds                        2,539,244         63,479              --       2,602,723
          Mortgage-backed securities            11,444,568         99,224              --      11,543,792
          Mutual funds                           1,281,043             --              --       1,281,043
          Equity securities                      1,082,661         46,368           3,553       1,125,476
                                               -----------    -----------     -----------     -----------

                                               $16,940,597        239,146           3,553      17,176,190
                                               ===========    ===========     ===========     ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                             2004               2003               2002
                                                         ------------        ---------          ---------
<S>                                                      <C>                 <C>                <C>
      Proceeds                                           $  4,163,567        4,919,279          7,771,215
      Gross realized gains                                    195,702           64,905            250,141
      Gross realized losses                                     6,998           31,384             13,757
</TABLE>


                                       32
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      The following table sets forth the Company's investment  securities' gross
      unrealized  losses and fair value,  aggregated by investment  type and the
      length of time the securities  have been in a continuous  unrealized  loss
      position at June 30, 2004.

<TABLE>
<CAPTION>
                              Less than 12 months                   12 months or more                         Total
                       ---------------------------------   ----------------------------------    --------------------------------
                              Fair   Unrealized                   Fair     Unrealized                  Fair    Unrealized
                        #    value      loss        %       #     value       loss       %       #     value      loss        %
                       --   -------  ----------   -----    --    -------   ----------  -----     --   -------  ----------  ------
                                (In Thousands)                       (In Thousands)                       (In Thousands)
<S>                    <C>  <C>         <C>       <C>       <C>  <C>           <C>     <C>       <C>  <C>         <C>      <C>
Corporate bonds         2   $ 1,045       (3)     (0.00)              --        --        --      2   $ 1,045       (3)    (0.00)
Mortgage-backed
 securities            10     5,839     (108)     (0.02)    2    $ 1,594       (77)    (0.05)    12     7,433     (185)    (0.07)
FHLB Bonds              1       495       (5)     (0.01)              --        --        --      1       495       (5)    (0.01)
FNMA Preferred
 Stock                  1       499       (1)     (0.00)              --        --        --      1       499       (1)    (0.00)
Equity securities       2       258      (58)     (0.23)              --        --        --      2       258      (58)    (0.23)
                       --   -------     ----      -----    --    -------       ---     -----     --   -------     ----     -----
   Total temporarily
    impaired
    securities         16   $ 8,136     (175)     (0.26)    2    $ 1,594       (77)    (0.05)    18   $ 9,730     (252)    (0.31)
                       ==   =======     ====      =====    ==    =======       ===     =====     ==   =======     ====     =====
</TABLE>

The Company  concluded  that the  impairments  disclosed  in the above table are
temporary  and  not   other-than-temporary   impairments.   The  mortgage-backed
securities are issued and guaranteed by FNMA, GNMA, and FHLMC. Unrealized losses
associated with the corporate bonds,  mortgage-backed securities, and FHLB bonds
are due to changes in interest  rates and will not result in the  non-collection
of principal and interest on these  investments.  The  unrealized  losses to the
FNMA  preferred  stock and the equity  securities  are viewed by the  Company as
temporary fluctuations in the market.

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


                                       33
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

(3)   Loans Receivable

      At June 30, 2004 and 2003, loans receivable consisted of the following:

                                                        2004            2003
                                                    -----------     -----------
      Residential real estate loans:
          One-to-four-family                        $36,054,919      34,207,391
          One-to-four family held-for-sale              563,784         767,394
          Multifamily                                   413,404         795,932
          Construction                                7,106,143       2,356,946
                                                    -----------     -----------
                                                     44,138,250      38,127,663
      Commercial real estate loans                    6,241,087       7,117,027
                                                    -----------     -----------
                    Total real estate                50,379,337      45,244,690
                                                    -----------     -----------

      Consumer loans:
          Automobile                                  3,113,110       2,996,073
          Home improvement                               69,695          85,927
          Deposit accounts                              226,965         296,876
          Other                                       4,404,061       3,655,966
                                                    -----------     -----------
                    Total consumer                    7,813,831       7,034,842
                                                    -----------     -----------
      Commercial business loans                      21,909,588      13,308,135
                                                    -----------     -----------

                                                     80,102,756      65,587,667

      Less:
          Deferred fees and discounts                    26,826          25,231
          Allowance for losses on loans                 697,267         555,626
                                                    -----------     -----------

                                                    $79,378,663      65,006,810
                                                    ===========     ===========

      At June 30,  2004  and  2003,  the  Company  had  committed  to  originate
      $3,593,000 and $4,497,000, respectively, of fixed and variable rate loans.
      In  addition,  the  Company  had  customers  with  unused  lines of credit
      totaling   $6,149,000   and   $2,037,000   at  June  30,  2004  and  2003,
      respectively.

      At June 30, 2004 and 2003, the Company had nonaccrual  loans of $2,623,000
      and $2,655,000, respectively. The allowance for losses on loans related to
      these   impaired   loans  was   approximately   $163,000   and   $196,000,
      respectively.  The average balances of such loans for the years ended June
      30, 2004,  2003, and 2002 were  $2,756,000,  $2,450,000,  and  $1,716,000,
      respectively.  For the years ended June 30, 2004, 2003, and 2002, interest
      income which would have been  recorded  under the  original  terms of such
      loans was approximately  $268,000,  $291,000, and $198,000,  respectively,
      and


                                       34
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      interest  income actually  recorded  amounted to  approximately  $116,000,
      $133,000, and $92,000, respectively.

      Loan  customers  of the Company  include  certain  executive  officers and
      directors and their related  interests and  associates.  All loans to this
      group were made in the ordinary course of business at prevailing terms and
      conditions.  Changes  in  loans  outstanding  to  executive  officers  and
      directors for the years ended June 30, 2004 and 2003 were as follows:

                                                        2004            2003
                                                    -----------     -----------
      Balance at beginning of year                  $    52,481          47,802
      Balance of new officer loan                            --          34,708
      Repayments                                        (32,929)        (30,029)
                                                    -----------     -----------

      Balance at end of year                        $    19,552          52,481
                                                    ===========     ===========

(4)   Allowance for Losses on Loans

      Following is a summary of the  allowance for losses on loans for the three
      years ended June 30, 2004:

                                             2004          2003          2002
                                          ---------     ---------     ---------

      Balance at beginning of year        $ 555,626       537,233       369,314
      Provision for losses on loans         300,000       235,800       331,500
      Charge-offs                          (177,625)     (222,793)     (164,223)
      Recoveries                             19,266         5,386           642
                                          ---------     ---------     ---------

      Balance at end of year              $ 697,267       555,626       537,233
                                          =========     =========     =========

(5)    Real Estate

       Following is a summary of real estate as of June 30, 2004 and 2003:

                                                         2004            2003
                                                      ----------      ----------

      Real estate acquired for investment             $  290,018         295,124
      Real estate acquired through foreclosure           147,004         343,534
                                                      ----------      ----------

                                                      $  437,022         638,658
                                                      ==========      ==========


                                       35
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

(6)   Office Property and Equipment

      At June 30, 2004 and 2003, the cost and accumulated depreciation of office
      property and equipment were as follows:

                                                          2004           2003
                                                      -----------    -----------

      Land                                            $   547,467        547,467
      Office buildings                                  1,746,628      1,667,361
      Furniture, fixtures, and equipment                1,530,832      1,238,677
      Construction in progress                          1,242,129         31,858
      Automobiles                                          53,723         24,000
                                                      -----------    -----------
                                                        5,121,779      3,509,363

      Less accumulated depreciation                     1,769,392      1,537,492
                                                      -----------    -----------

                                                      $ 3,352,387      1,971,871
                                                      ===========    ===========

(7)   Accrued Interest Receivable

      At June 30, 2004 and 2003,  accrued interest  receivable  consisted of the
      following:

                                                          2004           2003
                                                      -----------    -----------

      Loans receivable                                $   649,572        476,569
      Securities available-for-sale                        72,701         90,732
                                                      -----------    -----------

                                                      $   722,273        567,301
                                                      ===========    ===========

(8)   Deposits

      Deposit  account  balances  at June 30,  2004 and 2003 are  summarized  as
      follows:

                                                          2004           2003
                                                      -----------    -----------
      Balance by account type:
          Savings                                     $34,415,261     32,932,748
          Demand and NOW                               14,571,319     11,561,957
          Certificates of deposit                      29,736,809     29,928,047
                                                      -----------    -----------

                                                      $78,723,389     74,422,752
                                                      ===========    ===========

      The  aggregate   amount  of   certificates   of  deposit  with  a  minimum
      denomination  of $100,000 was  approximately  $4,009,000 and $3,239,000 at
      June 30, 2004 and 2003, respectively.


                                       36
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      At June 30, 2004,  scheduled maturities of certificates of deposit were as
      follows:

                 Years ended June 30:
                     2005                            $ 17,040,404
                     2006                               3,945,350
                     2007                               4,128,838
                     2008                               3,645,920
                     2009                                 976,297
                                                     ------------

                                                     $ 29,736,809
                                                     ------------

      Interest expense on deposits is summarized as follows:

                                                    Years ending June 30,
                                          --------------------------------------
                                             2004          2003          2002
                                          ----------    ----------    ----------

      Savings                             $  423,768       544,304       725,049
      Demand and NOW                          53,350        60,912        95,824
      Certificates of deposit                859,984     1,136,714     1,542,205
                                          ----------    ----------    ----------

                                          $1,337,102     1,741,930     2,363,078
                                          ==========    ==========    ==========

      At June 30, 2004 and 2003,  accrued  interest  payable on deposits totaled
      $263,522 and $306,246, respectively.


                                       37
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

(9) Advances from FHLB

      Advances from FHLB at June 30, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                      2004                                     2003
                                          --------------------------------        -------------------------------
                                                               Weighted                                Weighted
                                             Amount          average rates           Amount         average rates
                                          ----------         -------------        ----------        -------------
<S>                                       <C>                      <C>            <C>                   <C>
      Advance maturity:
          Within one year:
            Fixed                         $  750,000               1.47%          $1,025,785            4.86%
            Daily Adjustable                 300,000               1.71
          Beyond one year, but
            within five years -
            fixed                          6,907,750               4.36            3,118,528            5.32
          Beyond five years, but
            within ten years -
            fixed                                 --                               1,389,872            4.94
          Beyond ten years, but
            within fifteen years
            - fixed                               --                                  10,930            5.50
                                          ----------                              ----------

                                          $7,957,500                              $5,545,115
                                          ==========                              ==========
</TABLE>

      Advances from FHLB are secured by stock in FHLB. In addition, the Bank has
      agreed to maintain unencumbered additional security in the form of certain
      residential  mortgage  loans  aggregating no less than 130% of outstanding
      advances. Certain advances are callable on various dates.


                                       38
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

(10)  Taxes

      Taxes on income  (benefit)  for the years ended June 30, 2004,  2003,  and
      2002 were as follows:

<TABLE>
<CAPTION>
                                       2004                                          2003
                    -----------------------------------------       ---------------------------------------
                     Federal          State           Total          Federal         State          Total
                    ---------       ---------       ---------       ---------      ---------      ---------
<S>                 <C>                <C>            <C>             <C>             <C>           <C>
      Current       $ 518,300          97,300         615,600         443,000         86,950        529,950
      Deferred          8,500           1,500          10,000          40,900          6,050         46,950
                    ---------       ---------       ---------       ---------      ---------      ---------

                    $ 526,800          98,800         625,600         483,900         93,000        576,900
                    =========       =========       =========       =========      =========      =========

<CAPTION>
                                      2002
                    -----------------------------------------
                     Federal          State           Total
                    ---------       ---------       ---------
<S>                 <C>               <C>            <C>
      Current       $ 579,900          95,000         674,900
      Deferred       (107,000)        (16,000)       (123,000)
                    ---------       ---------       ---------
                    $ 472,900          79,000         551,900
                    =========       =========       =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                          Years ended June 30,
                                                    ---------------------------------
                                                       2004        2003        2002
                                                    ---------   ---------   ---------
<S>                                                      <C>         <C>         <C>
      Federal income tax rate                            34.0%       34.0%       34.0%
      Items affecting Federal income tax rate:
          State tax, net of Federal benefit               3.3         3.6         3.2
          Low income housing tax credits                 (2.2)       (2.5)       (2.6)
          Other, net                                     (3.1)       (1.5)       (0.9)
                                                    ---------   ---------   ---------

                                                         32.0%       33.6%       33.7%
                                                    =========   =========   =========
</TABLE>


                                       39
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

      The tax effects of  temporary  differences  that give rise to  significant
      portions of the deferred tax assets and deferred tax  liabilities  at June
      30, 2004 and 2003 are presented below:

<TABLE>
<CAPTION>
                                                                      2004               2003
                                                                  ------------      ------------
<S>                                                               <C>                    <C>
      Deferred tax assets:
          Accrued expenses not deducted                           $     50,700            50,000
          Unrealized losses on securities available-for-sale            83,200                --
          State net operating loss carryforwards                        13,000            13,000
          Allowance for losses on loans                                260,100           207,000
          Impairment on equity investments                                  --            22,000
                                                                  ------------      ------------

                    Total gross deferred tax assets                    407,000           292,000
                                                                  ------------      ------------

      Deferred tax liabilities:
          FHLB stock dividends                                          13,300            23,000
          Unrealized gains on securities available-for-sale                 --            88,000
          Accrued interest receivable not taxed                          1,300             1,000
          Deferred loan fees                                            94,000            77,000
          Depreciation                                                  77,200            43,000
                                                                  ------------      ------------

                    Total gross deferred tax liabilities               185,800           232,000
                                                                  ------------      ------------

                    Net deferred tax assets                       $    221,200            60,000
                                                                  ============      ============
</TABLE>

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

      At June 30,  2004 and  2003,  the Bank  had  Federal  income  tax bad debt
      reserves  of  approximately  $1,263,000,   respectively,  that  constitute
      allocations to bad debt reserves for Federal income tax purposes for which
      no provision  for taxes on income had been made. If such  allocations  are
      charged for other than bad debt losses,  taxable  income is created to the
      extent of the charges.  The Bank's retained  earnings at June 30, 2004 and
      2003 were  substantially  restricted because of the effect of these income
      tax bad debt reserves.

(11)  Employee Benefits

      (a)   Pension Plan

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

            On September 1, 2003 the Company froze its defined  benefit  pension
            plan and is in the process of  terminating  the plan.  The  standard
            termination  commenced on June 30, 2004.  The pension plan liability
            recorded  by the  Company  at June 30,  2004 and 2003 was  $127,000.
            Estimated


                                       40
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                          June 30, 2004, 2003 and 2002

            plan liabilities  supplied in the sensitivity  analysis  provided to
            the plan by Principal  Financial  Group  supports the  determination
            that the plan assets and the Company's  current pension plan accrued
            liability will cover the estimated  termination funding of the plan.
            However, actual distributions from the termination of the plan could
            take up to 18 months to complete and the final cost to terminate the
            plan will be  unknown  until  distribution  occurs.  Depending  upon
            interest rates at the time of distribution, the plan liability could
            be more or less than the  expected  amount.  The value of assets can
            change  dramatically  with  market  conditions.   The  Company  will
            continue to monitor the estimated plan termination liability, but at
            this  time  does  not  expect  that  additional   accruals  will  be
            necessary.

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

<TABLE>
<S>                                                                      <C>
            Change in benefit obligation:
                Benefit obligation at beginning of year                  $ 1,304,807
                Service cost                                                  54,782
                Interest cost                                                 89,920
                Actuarial (gain) loss                                        325,969
                Benefits paid                                                (40,444)
                                                                         -----------

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

            Change in plan assets:
                Fair value of plan assets at beginning of year           $ 1,449,706
                Actual return on plan assets                                 (78,095)
                Employer contributions                                        31,080
                Benefits paid                                                (40,444)
                                                                         -----------

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

            Reconciliation of funded status:
                Funded status underfunded                                $  (372,787)
                Unrecognized net actuarial gain                              251,953
                Unrecognized transition asset                                 (6,391)
                                                                         -----------

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


                                       41
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2004 and 2003

            Pension  expense for the years ended June 30, 2003 and 2002 includes
            the following components:

<TABLE>
<CAPTION>
                                                               2003              2002
                                                            ---------        ---------
<S>                                                         <C>                 <C>
            Service cost                                    $  54,782           57,617
            Interest cost                                      89,920           57,987
            Expected return on plan assets                   (110,785)         (78,227)
            Recognized net actuarial gain                      (7,311)            (862)
            Amortization of transition asset                   (1,447)          (1,447)
                                                            ---------        ---------

                          Pension expense                   $  25,159           35,068
                                                            =========        =========
</TABLE>

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

            There was no pension  expense  recorded  for the year ended June 30,
            2004.

      (b)   Employment Agreements

            The Company has entered into employment agreements,  which expire in
            July  2007,  with  two of its  executive  officers.  The  agreements
            provide,  among other  things,  for payment to the officers of up to
            299% of the officers'  then-current annual compensation in the event
            there  is a  change  of  control  of the  Company  where  employment
            terminates involuntarily in connection with such change of control.

      (c)   Stock Options

            Certain  officers  and  directors  of the Company  have been granted
            options to purchase up to 9,060  shares of the  Company's  $0.01 par
            common stock.  The exercise  price is equal to the fair market value
            of the shares at the date the options are  granted.  The options are
            subject to certain vesting  requirements and, if unused, the options
            will expire October 2004.


                                       42
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2004 and 2003

            Changes in options  outstanding and exercisable  during 2004,  2003,
            and 2002 were as follows:

<TABLE>
<CAPTION>
                                  Exercisable      Outstanding        Option price      Weighted
                                    options          options            per share     average price
                                  -----------      -----------        ------------    -------------
<S>                                   <C>              <C>            <C>                 <C>
            June 30, 2001             45,060           45,060         $5.50 - 6.06        $5.55
            Vested                        --               --
            Expired                     (600)            (600)                5.50         5.50
            Exercised                 (1,720)          (1,720)                5.69         5.69
                                  ----------       ----------

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

            June 30, 2003             31,800           31,800          5.50 - 6.06         5.50
            Vested                        --               --
            Expired                       --               --
            Exercised                (22,740)         (22,740)                5.50         5.50
                                  ----------       ----------

            June 30, 2004              9,060            9,060                 5.50         5.50
                                  ==========       ==========
</TABLE>

(12)  Stockholders' Equity

      (a)   Regulatory Capital Requirements

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

            The Federal Deposit  Insurance  Corporation  Improvement Act of 1991
            (FDICIA)  established  additional capital requirements which require
            regulatory  action  against  depository  institutions  in one of the
            undercapitalized  categories  defined in  implementing  regulations.
            FDICIA  requires  depository  institutions  to  maintain  a tangible
            equity ratio of 2%. Institutions such as the Bank, which are defined
            as well  capitalized,  must generally have a leverage capital (core)
            ratio of at least 5%, a tier I risk-based  capital ratio of at least
            6%, and a total  risk-based  capital  ratio of at least 10%.  FDICIA
            also  provides  for  increased  supervision  by  federal  regulatory
            agencies,  increased  reporting  requirements for insured depository
            institutions,   and  other  changes  in  the  legal  and  regulatory
            environment  for such  institutions.  The  Bank  met all  regulatory
            capital requirements at June 30, 2004 and 2003.


                                       43
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2004 and 2003

            The Bank's actual and required capital amounts and ratios as of June
            30, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                                                                        To be well capitalized
                                                                           For capital adequacy         under prompt corrective
                                                   Actual                        purposes                  action provisions
                                        -------------------------       ------------------------       -------------------------
               June 30, 2004               Amount           Ratio          Amount          Ratio          Amount          Ratio
<S>                                     <C>                   <C>       <C>                  <C>       <C>                  <C>
            Tangible capital (to
                tangible assets)        $ 9,414,000           9.6%      $ 1,953,860          2.0%      $        --           --%
            Leverage/equity (core)
                capital (to
                adjusted tangible
                assets)                   9,414,000           9.6         3,907,720          4.0         4,884,650           5.0
            Tier I risk-based
                capital (to
                risk-weighted
                assets)                   9,414,000          12.8         2,938,560          4.0         4,407,840           6.0
            Risk-based (total)
                capital (to
                risk-weighted
                assets)                  10,068,000          13.7         5,877,120          8.0         7,346,400          10.0

<CAPTION>
                                                                                                        To be well capitalized
                                                                           For capital adequacy         under prompt corrective
                                                   Actual                        purposes                  action provisions
                                        -------------------------       ------------------------       -------------------------
               June 30, 2003               Amount           Ratio          Amount          Ratio          Amount          Ratio
<S>                                     <C>                   <C>       <C>                  <C>       <C>                  <C>
               Tangible capital (to
                tangible assets)        $ 8,203,000           9.2%      $ 1,788,340          2.0%      $        --           --%
            Leverage/equity (core)
                capital (to
                adjusted tangible
                assets)                   8,203,000           9.2         3,576,680          4.0         4,470,850           5.0
            Tier I risk-based
                capital (to
                risk-weighted
                assets)                   8,203,000          13.3         2,469,480          4.0         3,704,220           6.0
            Risk-based (total)
                capital (to
                risk-weighted
                assets)                   8,732,000          14.1         4,938,960          8.0         6,173,700          10.0
</TABLE>

      (b)   Dividend Restrictions

            Federal  regulations  impose  certain  limitations on the payment of
            dividends and other  capital  distributions  by the Bank.  Under the
            regulations, a savings institution,  such as the Bank, that meet the
            requirement of being  adequately  capitalized (as defined by the OTS
            regulations as Tier 1 leverage capital of 4% or greater,  and Tier 1
            risk-based capital of 4% or greater, and Total risk-based capital of
            8% or greater  subsequent  to a capital  distribution)  is generally
            permitted to make such capital  distributions  without OTS approval,
            but by giving notice of the capital distribution to the OTS, subject
            to  certain   limitations  and  restrictions  as  described  in  the
            regulations.  The Bank gives notice to the OTS before any payment of
            dividends or other capital distributions unless the proposed capital
            distribution  falls within the application  requirements  for an OTS
            capital distribution approval.


                                       44
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2004 and 2003

(13)  Fair Value of Financial Instruments

      The estimated  fair values of the Company's  financial  instruments  as of
      June 30, 2004 and 2003 were as follows:

<TABLE>
<CAPTION>
                                                    2004                                   2003
                                     ---------------------------------      --------------------------------
                                     Carrying value         Fair value      Carrying value        Fair value
                                     --------------         ----------      --------------        ----------
<S>                                    <C>                 <C>                <C>                <C>
      Financial assets:
          Cash and cash
            equivalents                $ 1,863,244          1,863,244          5,303,912          5,303,912
          Securities
            available-for-sale          12,494,069         12,494,069         17,176,190         17,176,190
          Loans                         79,378,663         86,407,620         65,006,810         67,955,222
          FHLB stock                       464,000            464,000            509,200            509,200
          Accrued interest
            receivable                     722,273            722,273            567,301            567,301
      Financial liabilities:
          Deposits                      78,723,389         79,311,172         74,422,752         75,144,662
          FHLB advances                  7,957,500          7,900,220          5,545,115          6,195,028
          Advance payments by
            borrowers for
            taxes and insurance            353,802            353,802            347,265            347,265
          Accrued interest
            payable                        263,522            263,522            306,246            306,244

<CAPTION>
                                                            Unrealized         Notional           Unrealized
                                     Notional value       Gains (losses)         Value          gains (losses)
                                     --------------       --------------      -----------       --------------
<S>                                    <C>                         <C>         <C>                       <C>
      Off balance sheet assets:
          Commitments to
            extend credit              $ 3,593,000                 --          4,497,325                 --
          Unused lines of
            credit                       6,148,991                 --          2,036,956                 --
</TABLE>

(14)  Contingency

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


                                       45
                                                                     (Continued)
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                          Notes to Financial Statements

                             June 30, 2004 and 2003

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

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

                            Condensed Balance Sheets


<TABLE>
<CAPTION>
                                                                                      2004                2003
                                                                                  ------------       ------------
<S>                                                                               <C>                  <C>
      Cash and cash equivalents                                                   $    518,065            200,883
      Securities available-for-sale                                                    318,072            606,976
      Loans receivable, net                                                            923,562            989,447
      Investment in subsidiary                                                       9,360,652          8,318,106
      Real estate                                                                      194,164            199,270
      Interest receivable                                                               83,932             47,804
      Deferred tax asset                                                                33,800             25,775
      Accrued income taxes receivable                                                   32,555             55,789
                                                                                  ------------       ------------

                    Total assets                                                  $ 11,464,802         10,444,050
                                                                                  ============       ============

      Common stock                                                                $     10,462             10,462
      Additional paid-in capital                                                     5,052,022          5,025,598
      Retained earnings                                                              8,639,455          7,498,305
      Treasury stock, at cost                                                       (2,099,098)        (2,237,884)
      Accumulated other comprehensive income - net unrealized
          (loss) gain on securities available-for-sale                                (138,039)           147,569
                                                                                  ------------       ------------

                    Total stockholders' equity                                      11,464,802         10,444,050
                                                                                  ------------       ------------

                    Total liabilities and stockholders' equity                    $ 11,464,802         10,444,050
                                                                                  ============       ============
</TABLE>

                       Condensed Statements of Operations

<TABLE>
<CAPTION>
                                                                     2004              2003              2002
                                                                 -----------       -----------       -----------
<S>                                                              <C>                 <C>               <C>
      Interest income                                            $   110,898           117,680           114,049
      Equity in earnings of subsidiaries                           1,253,189         1,196,807         1,016,637
      Gain on sale of securities                                      94,256            18,924           207,645
      Other expenses                                                (148,676)         (113,149)         (198,525)
      Impairment loss on equity securities                                --          (182,702)          (80,360)
                                                                 -----------       -----------       -----------

                    Net earnings before tax                        1,309,667         1,037,560         1,059,446

      Income tax benefit                                              21,000           101,550            26,000
                                                                 -----------       -----------       -----------

                    Net earnings                                 $ 1,330,667         1,139,110         1,085,446
                                                                 ===========       ===========       ===========
</TABLE>


                                       46
                                                                     (Continued)
<PAGE>

                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                             2004              2003               2002
                                                          -----------       -----------       -----------
<S>                                                       <C>                <C>               <C>
      Operating activities:
          Net earnings                                    $ 1,330,667         1,139,110         1,085,446
          Equity in earnings of subsidiary                 (1,328,154)       (1,196,807)       (1,016,637)
          Gain on sale of securities                          (94,256)          (18,924)         (207,645)
          Impairment losses on securities                          --           182,702            80,360
          Tax benefit from exercise of stock option                --                --             3,087
          Other, net                                           10,611           (85,570)           28,674
                                                          -----------       -----------       -----------

                    Net cash (used in) provided by
                      operating activities                    (81,132)           20,511           (26,715)
                                                          -----------       -----------       -----------

      Investing activities:
          Proceeds from sale of securities
            available-for-sale                              1,222,130         1,202,268         2,339,371
          Purchase of securities available-for-sale          (836,971)       (1,193,102)       (2,365,385)
          Loans receivable, net                                65,885           (84,028)         (145,507)
                                                          -----------       -----------       -----------

                    Net cash provided by (used in)
                      investing activities                    451,044           (74,862)         (171,521)
                                                          -----------       -----------       -----------

      Financing activities:
          Dividends from subsidiary                                --           250,000                --
          Treasury stock acquired                              (2,600)         (184,448)               --
          Exercise of stock options                           125,069            62,172             9,783
          Dividends paid                                     (173,200)         (152,277)         (135,264)
                                                          -----------       -----------       -----------

                    Net cash used in financing
                      activities                              (50,730)          (24,553)         (125,481)
                                                          -----------       -----------       -----------

                    Net increase (decrease) in cash
                      and cash equivalents                    317,182           (78,904)         (323,717)

      Cash and cash equivalents at beginning of year          200,883           279,787           603,504
                                                          -----------       -----------       -----------

      Cash and cash equivalents at end of year            $   518,065           200,883           279,787
                                                          ===========       ===========       ===========
</TABLE>


                                       47
                                                                     (Continued)
<PAGE>

                     HORIZON FINANCIAL SERVICES CORPORATION
                             STOCKHOLDER INFORMATION

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

ANNUAL MEETING

The Annual  Meeting of  Stockholders  will be held at 3:00 p.m.  local time,  on
October 28, 2004, at the main office of Horizon  Federal  Savings Bank,  301 1st
Avenue East, Oskaloosa, Iowa.

STOCK LISTING

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

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
                                FISCAL 2004                                                   FISCAL 2003
                   ---------------------------------------                      --------------------------------------
                      HIGH          LOW         DIVIDENDS                        HIGH            LOW        DIVIDENDS
                   ----------    ---------     -----------                      -------        -------     -----------
<S>                  <C>           <C>             <C>       <C>                <C>            <C>           <C>
First Quarter        $14.000       $12.850         $.0525    First Quarter      $10.600        $10.050       $.0500
Second Quarter        17.000        13.700          .0550    Second Quarter      11.060         10.050        .0500
Third Quarter         18.000        16.050          .0575    Third Quarter       12.450         11.100        .0500
Fourth Quarter        16.500        14.200          .0600    Fourth Quarter      13.000         11.000        .0525
</TABLE>

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

At September 3, 2004,  there were 771,371 shares of Horizon  Financial  Services
Corporation   common  stock  issued  and  outstanding  and   approximately   120
stockholders of record.


                                       48
<PAGE>

STOCKHOLDERS AND GENERAL INQUIRIES            TRANSFER AGENT

                                              First Bankers Trust Services, Inc.
Robert W. DeCook, President and CEO           2321 Kochs Lane
Horizon Financial Services Corporation        P.O. Box 4005
301 1st Avenue East                           Quincy, IL 62305-4005
Oskaloosa, Iowa  52577                        (217) 228-8060


                                       49
<PAGE>

                     HORIZON FINANCIAL SERVICES CORPORATION
                              CORPORATE INFORMATION

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

COMPANY AND BANK ADDRESS

301 1st Avenue East                            Telephone:  (641) 673-8328
Oskaloosa, IA  52577                           Fax:        (641) 673-0074

DIRECTORS OF THE BOARD

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

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

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

Michael F. Cooney, III
   Retired Partner with KPMG LLP
   West Des Moines, Iowa

HORIZON FINANCIAL SERVICES CORPORATION EXECUTIVE OFFICERS

Robert W. DeCook
   President and Chief Executive Officer

Vicki Hladik
   Treasurer and Chief Financial Officer

INDEPENDENT AUDITORS

KPMG LLP
666 Grand Avenue
Suite 2500
Des Moines, IA  50309

CORPORATE COUNSEL

McCoy, Faulkner & Broerman
216 South 1st Street
Oskaloosa, Iowa  52577

SPECIAL COUNSEL

Katten Muchin Zavis Rosenman
1025 Thomas Jefferson Street, NW
East Lobby, Suite 700
Washington, DC  20007-5201

#4155645


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