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1999 ANNUAL REPORT

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                           HORIZON FINANCIAL SERVICES
                                   CORPORATION



<PAGE>
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TABLE OF CONTENTS
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         President's Letter to Shareholders................................... 1
         Selected Consolidated Financial Information.......................... 2
         Management's Discussion and Analysis of Financial
           Condition and Results of Operation................................. 4
         Consolidated Financial Statements....................................17
         Stockholder Information..............................................44
         Corporate Information................................................45







                          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,  1999,  as filed with the  Securities  and  Exchange
Commission,  may be obtained  without  charge by  contacting  Robert W.  DeCook,
President and Chief Executive Officer,  Horizon Financial Services  Corporation,
301 First Avenue East, Oskaloosa, Iowa, (515) 673-8328.
<PAGE>
                         [HORIZON FINANCIAL LETTERHEAD]

                                                September 24, 1999




Dear Stockholder:

For many financial  institutions,  fiscal 1999 was a year of mixed results, some
good, some bad. Horizon  Financial was no exception to this  development,  which
saw the stock  prices of the  financial  institutions  trend  down as  investors
concentrated  their investing efforts on other segments of the economy,  notably
high tech.

For Horizon Financial,  and its principal  operating  subsidiary Horizon Federal
Savings  Bank,  the good news is that its core  operations  produced  the second
highest  net income  after  provision  for loan  losses in the last five  fiscal
years, second only to the record-breaking results of fiscal 1998. Unfortunately,
Horizon Financial took a loss on its portfolio of securities available-for-sale.

The decline in value of these securities  resulted from a sustained  increase in
the prepayment speeds of the underlying mortgage loans. Most of these securities
held by the Company were sold during the fiscal year ending June 30, 1999.

Core  earnings for the Company  remained  strong  enough that the net worth only
decreased  $427,000  from June 30,  1998 to June 30,  1999,  approximately  five
percent of the Company's net worth. Horizon Federal Savings Bank remains in full
compliance  with  regulatory  capital  requirements.  At June 30, 1999,  Horizon
Financial  Services  Corporation  had assets of $85.0  million and  stockholders
equity of $8.1 million or $9.21 per share of common stock.

We are further  encouraged  that future losses on the  remaining  portion of our
securities  held for sale  portfolio  appear at this writing to be abating,  and
that the Company expects to return to its historic  profitability  in the second
quarter of this fiscal year.

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

Yours very truly,

/s/Robert W. DeCook

Robert W. DeCook
President and Chief Executive Officer
<PAGE>
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                             At June 30,
                                                 -------------------------------------------------------------------
                                                     1999        1998(1)      1997(1)      1996(1)        1995(1)
                                                 -------------------------------------------------------------------
                                                                           (In Thousands)
<S>                                                 <C>         <C>           <C>           <C>           <C>
Selected Financial Condition Data:

Total assets.....................................   $85,023     $89,947       $85,969       $73,464       $69,624
Cash and cash equivalents........................     7,917       6,367         5,621         3,471         3,812
Securities available-for-sale....................    17,097      23,922        24,942        18,049         5,170
Loans receivable, net............................    56,066      55,996        52,193        49,104        46,478
Deposits.........................................    59,576      60,145        57,641        54,759        51,330
Advances from FHLB...............................    16,606      20,038        19,102         9,661         8,718
Stockholders' equity.............................     8,060       8,488         8,412         8,390         8,786

<CAPTION>
                                                                          Year Ended June 30,
                                                   -----------------------------------------------------------------
                                                       1999         1998(1)     1997(1)      1996(1)      1995(1)
                                                   -----------------------------------------------------------------
                                                                 (In Thousands, Except Per Share Data)
<S>                                                 <C>           <C>        <C>           <C>          <C>
Selected Operations Data:

Total interest income..............................   $6,192        $6,744     $5,895        $5,454       $4,752
Total interest expense.............................    3,642         4,021      3,402         3,144        2,443
                                                     -------        ------     ------        ------       ------
  Net interest income..............................    2,550         2,723      2,493         2,310        2,309
Provision for losses on loans......................      139            94        252           328            2
                                                     -------        ------    -------       -------       ------
Net interest income after
 provision for losses on loans.....................    2,411         2,629      2,241         1,982        2,307
Noninterest income
  Fees, commissions and service charges............      497           448        338           345          238
  Gain (loss) on sale of securities, net...........  (2,038)         (167)         81            39          ---
  Other noninterest income.........................        8            27         19            94           23
                                                     -------        ------    -------       -------       ------
Total noninterest income...........................  (1,533)           308        438           478          261
Total noninterest expense..........................    2,116         2,031      2,255(2)      1,886        1,904
                                                      ------        ------     ------        ------       ------
(Loss), earnings before taxes on income............  (1,238)           906        424           573          664
Taxes on income (benefits).........................    (466)           317        146           197          245
                                                     -------        ------     ------        ------       ------
Net (loss) earnings................................   $(772)          $589       $278          $376         $419
                                                      ======          ====       ====          ====         ====

Basic (loss) earnings per common share.............  ($0.90)        $ 0.71     $ 0.34        $ 0.43       $ 0.44
Diluted (loss) earnings per common share...........  ($0.90)        $ 0.69     $ 0.33        $ 0.42       $ 0.44
Dividends per share................................   $0.18         $ 0.18     $ 0.16        $ 0.16       $ 0.08
</TABLE>
-------------------
(1)  All per share  information  has been  restated for the 2-for-1  stock split
     paid by the  Company  on  November  10,  1997 in the  form of a 100%  stock
     dividend.

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

                                        2
<PAGE>
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                                           -------------------------------------------------------
                                                              1999        1998       1997       1996        1995
                                                           -------------------------------------------------------
<S>                                                           <C>         <C>       <C>         <C>         <C>
Selected Financial Ratios and Other Data:

Performance Ratios:
  Return on assets (ratio of net earnings to average
     total assets).........................................     (.88%)       .67%      .35(1)      .53%        .64%
  Interest rate spread information:
   Average during year.....................................     3.00        2.96      3.12        3.09        3.42
   End of year.............................................     3.03        3.05      3.07        3.06        2.59
  Net interest margin(2)...................................     3.17        3.23      3.41        3.44        3.82
  Ratio of operating expense to average total
    assets.................................................     2.42        2.31      2.83(1)     2.64        2.92
  Return on stockholders' equity (ratio of net
    earnings to average equity)............................    (9.33)       6.97      3.31(1)     4.38        4.82
 Efficiency ratio(3).......................................    69.26       63.51     67.51       68.61       74.09

Asset Quality Ratios:
 Non-performing assets to total assets at end of
   year(4).................................................     1.36        1.02      1.22        1.27        1.06
 Allowance for losses on loans to non-performing
    loans(4)...............................................    29.57       37.74     50.51       34.01       39.27
 Allowance for losses on loans  to total loans.............      .61         .61       .65         .63         .62

Other Ratios:
 Stockholders' equity to total assets at end of
   year....................................................     9.48        9.44      9.78       11.42       12.62
 Average stockholders' equity to average assets............     9.46        9.61     10.54       12.00       13.34
 Average interest-earning assets to average
    interest-bearing liabilities...........................   103.79%     105.65%   106.13%     107.31%     109.88%

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

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

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

(3)  Noninterest  expense (not including one-time SAIF assessment paid in fiscal
     1997)  divided by net interest  income and other  income,  (excluding  gain
     (loss) on sale of securities, net).

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

                                        3
<PAGE>
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

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

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

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

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

         Some local economic conditions in the Bank's market are weakening.  The
farm economy has been strong for over five years but is now beginning to soften.
As a result of an  over-supply  of grain,  farm prices for grain and  livestock,
which are  currently  depressed,  may continue to remain  depressed and possibly
even drop further. In addition, the Bank is experiencing difficulty, as are most
business in the area,  in hiring and  retaining  experienced  personnel as labor
shortages  in the area  continue to exist.  In the event  current  economic  and
market  conditions  persist or worsen,  loan  demand and  existing  loans may be
affected.  No assurances  can be given that the Bank will be able to maintain or
increase  its  loan  portfolio,  which  could  adversely  affect  the  financial
condition and results of operations of the Company and the Bank.

Forward-Looking Statement

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

                                        4
<PAGE>
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, 1999 Compared to June 30, 1998.  Total assets  decreased  $4.9
million,  or 5.5%,  to $85.0 million at June 30, 1999 from $89.9 million at June
30, 1998.  The decrease was  reflected  primarily in a $6.8 million  decrease in
securities  available-for-sale.  This  decrease was  partially  offset by a $1.5
million increase in cash and cash equivalents and a $500,000  increase in income
tax  receivable.  The  decrease  was used  primarily  to pay off $3.4 million in
advances  from the  Federal  Home Loan Bank (the  "FHLB")  of Des  Moines  and a
decrease in deposits of $600,000.

         Total liabilities  decreased $4.5 million, or 5.5%, to $77.0 million at
June 30, 1999 from $81.5  million at June 30,  1998,  primarily as a result of a
$3.4 million decrease in FHLB advances and a $600,000 decrease in deposits.

         Stockholder's equity decreased $427,000,  or 5.03%, during fiscal 1999,
primarily due to the net loss,  the payment of cash dividends by the Company and
the  repurchase of the Company's  common stock.  During fiscal 1999, the Company
paid cash dividends totaling  approximately  $154,000 or $.18 per share.  Common
stock was repurchased during 1999 at a cost of $44,375, or $8.88 per share under
a repurchase program.  The decrease in stockholder's equity was partially offset
by  a   positive   adjustment   of   net   unrealized   losses   on   securities
available-for-sale and the amortization for the allocated portion of shares held
by the Employee Stock Ownership Plan (the "ESOP").

         June 30, 1998 Compared to June 30, 1997.  Total assets  increased  $4.0
million,  or 4.7%,  to $89.9 million at June 30, 1998 from $85.9 million at June
30,  1997.  The increase  was  reflected  in a $3.8  million  increase net loans
receivable,  a $700,000  increase in cash and cash  equivalents,  and a $400,000
increase in deferred  income tax. The increase  was  partially  offset by a $1.0
million  decrease in securities  available-for-  sale. The increases were funded
primarily through a $2.5 million increase in deposits and additional advances of
$900,000  from the FHLB of Des Moines.  The Company  continued  to leverage  its
capital  through  FHLB  advances  to  increase  the  Company's   earnings.   See
"Asset\Liability Management."

         Total liabilities  increased $3.9 million, or 5.0%, to $81.5 million at
June 30, 1998 from $77.6  million at June 30,  1997,  primarily as a result of a
$2.5 million increase in deposits and a $900,000 increase in FHLB advances.  The
increase in deposits was due to the deposit of short-term  public funds with the
Company, of which  approximately $2.0 million were withdrawn  subsequent to June
30, 1998.

         Stockholder's  equity increased  $75,000,  or .89%, during fiscal 1998,
primarily  through  the  retention  of net  income,  net  proceeds  received  in
connection with the exercise of Company stock options and the  amortization  for
the  allocated  portion  of  shares  held  by the  ESOP,  offset  by a  negative
adjustment of net  unrealized  losses on securities  available-for-sale  and the
payment of cash  dividends  by the  Company.  The  Company  paid cash  dividends
totaling approximately $145,000 or $.175 per share.

                                        5
<PAGE>
Results of Operations

Comparison of Years Ended June 30, 1999 and June 30, 1998

         General.  Net  earnings  for the year  ended  June 30,  1999  decreased
$1,361,000 to a net loss of ($772,000) from $589,000 for the year ended June 30,
1998.  This decrease was primarily  attributable  to substantial  write-downs on
interest only mortgage-backed securities, as further described below, and losses
on the sale of available-for-sale assets.

         During fiscal 1999, the Company's return on average assets ("ROAA") and
return  on  average  stockholder's  equity  ("ROAE")  was  (.88%)  and  (9.33%),
respectively,  compared to .67% and 6.97% for fiscal 1998. Average stockholders'
equity to average  assets was 9.46%  during  fiscal year 1999  compared to 9.61%
during  fiscal  1998.  The Company  paid cash  dividends  of $0.18 per share for
fiscals 1999 and 1998.

         Interest Income. Interest income decreased $552,000 to $6.2 million for
the year ended June 30, 1999  compared  to $6.7  million for the year ended June
30,  1998.  The decrease  was  attributable  primarily to a decrease in interest
earned on securities available-for-sale as a result of a decrease in the average
outstanding  balance of these assets and to a lesser degree due to a decrease in
interest rates.  Also contributing to the decrease was the reduction of interest
earned on loans receivable as a result of reduced interest rates for the period.
The average outstanding balance of securities  available-for-sale decreased $4.4
million  to  $21.0  million  during  fiscal  1999.  The  yield  on  all  average
interest-earning  assets decreased during fiscal 1999 to 7.70% from 8.00% during
fiscal 1998.

         Interest Expense.  Interest expense decreased  $379,000 to $3.6 million
for the year ended June 30,  1999  compared  to $4.0  million for the year ended
June 30, 1998. The decrease in interest expense was primarily  attributable to a
decrease in the average  outstanding  balance of FHLB  advances,  combined  with
decreased  rates  paid on FHLB  advances.  The  average  rate  paid on  advances
decreased  by 43 basis  points to 5.26%  during  fiscal  1999 from 5.69%  during
fiscal 1998. The average rate paid on all interest-bearing liabilities decreased
34 basis points to 4.70% during fiscal 1999 from 5.04% during fiscal 1998.

         Net Interest  Income.  Net interest income  decreased  $173,000 to $2.5
million  in fiscal  1999  from $2.7  million  in fiscal  1998.  The ratio of the
Company's   average   interest-earning   assets  to   average   interest-bearing
liabilities  decreased to 103.79%  during fiscal 1999 from 105.65% during fiscal
1998.  During  this same period the  Company's  interest  rate spread  increased
slightly to 3.00% from 2.96%.

         Provision  for Losses on Loans.  The provision for losses on loans is a
result of  management's  periodic  analysis  of the  adequacy  of the  Company's
allowance for losses on loans.  During the year ended June 30, 1999, the Company
had a $139,000  addition  to its  allowance  for losses on loans  compared  to a
$94,000  provision in fiscal 1998.  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 toward reserve levels,  consistent with the Company's loss
experiences  and  considering,  among  other  factors,  the  composition  of the
Company's   loan   portfolio,   the  level  of  the  Company's   classified  and
non-performing  assets  and  their  estimated  value.  Future  additions  to the
Company's  allowance  for losses on loans and any change in the related ratio of
the allowance for losses on loan to non-performing  loans are dependent upon the
economy, changes in real estate values and interest rates. In addition,  federal
regulators may require  additional  reserves as a result of their examination of
the  Company.  The  allowance  for  losses on loans  reflects  what the  Company
currently  believes is an adequate  level of reserves,  although there can be no
assurance  that future  losses will not exceed the  estimated  amounts,  thereby
adversely  affecting future results of operations.  As of June 30, 1999 and June
30, 1998 the Company's  allowance for losses on loans was $343,000 and $348,000,
respectively.

                                        6
<PAGE>
         As of June 30, 1999, the Company's non-performing assets, consisting of
nonaccuring loans, accruing loans 90 days or more delinquent,  real estate owned
and repossessed  consumer property,  totaled $1,160,000 or 1.36% of total assets
compared to $922,000 or 1.02% of total assets at June 30, 1998.  The increase in
non-performing  assets related  primarily to a $238,000 increase in non-accruing
loans past-due 90 or more days.

         Noninterest  Income.  Noninterest  income  decreased  $1.8  million  to
$(1,533,000)  for the year ended June 30, 1999 from  $308,000 for the year ended
June 30, 1998. The decrease was primarily attributable to a $2.0 million loss on
securities  available-for-sale  (including  a $1.5 million  loss  recognized  on
interest only  mortgage-backed  securities).  The  write-downs on  interest-only
mortgage-backed securities resulted from a decline in fair value that was judged
to be other than temporary. This decline in fair value resulted from a sustained
increase  in the  prepayment  speeds,  due  to  refinancing,  of the  underlying
mortgage loans as a result of the low interest rate environment. The Bank cannot
predict interest rates or prepayment speeds.

         This  decrease  was  slightly  offset  by a $49,000  increase  in fees,
service  charges and  commission,  due to  increased  fees  received on checking
accounts and increased loan fees, primarily attributable to loans originated for
sale in the secondary market.

         Noninterest  Expense.  Noninterest  expense  increased  $86,000 to $2.1
million  for the year ended June 30,  1999 from $2.0  million for the year ended
June 30,  1998.  The increase was  primarily  due to a $38,000  increase in data
processing  services  and  a  $55,000  increase  in  other  noninterest  expense
primarily due to costs associated with the conversion to a new data center.  The
conversion  has  permitted us to offer new services to our  customers  including
telephone banking.

         The Company has incurred  costs in connection  with the  assessment of,
and the  documenting  and  remediation  its  electronic  systems,  programs  and
processes  to  recognize  properly  the year 2000.  While the  Company  does not
believe that the process of making its systems,  programs  and  procedures  year
2000  ready  ("Y2K")  will  result  in  material  cost,  it is  expected  that a
substantial  amount of management  and staff time will be required.  The Company
currently  expects to spend  approximately  $25,000 in connection  with its year
2000  readiness  efforts.  It  is  impossible  to  predict  the  exact  expenses
associated  with year 2000  preparedness  as additional  funds may be needed for
unknown expenses related to year 2000 testing,  potential charges by third party
software vendors for product enhancements, and, if necessary, for developing and
implementing  any  contingency  plans in the event such  enhancements  cannot be
made.  Furthermore,  the readiness of our service  provider,  as well as certain
vendors and customers,  may affect our preparedness.  No assurance can be given,
that the Company's third party service  providers' or other outside parties year
2000  readiness  efforts  will  proceed as  anticipated,  or that the results of
operations  of the Company will not be  adversely  affected by  difficulties  or
delays in the Company's or third parties' year 2000 readiness efforts.

         Income Tax Expense.  Income taxes decreased  $783,000 to ($467,000) for
the year ended June 30,  1999 from  $317,000  for the same  period in 1998.  The
decrease was primarily due to a decrease in earnings before taxes on income.

Comparison of Years Ended June 30, 1998 and June 30, 1997

         General.  Net  earnings  for the year  ended  June 30,  1998  increased
$311,000  to  $589,000  from  $278,000  for the year ended June 30,  1997.  This
increase was  primarily  due to an increase of $388,000 in net  interest  income
after provision for loan losses,  a decrease in FDIC premiums,  primarily due to
the absence of the one-time  SAIF  assessment  paid in fiscal 1997, of $331,000,
and an  increase  of $110,000  in fee  income.  Net  earnings,  without the SAIF
assessment,  for the year  ended  June 30,  1997  would  have been  $485,000  as
compared to $589,000 for the same period  ended June 30,  1998,  resulting in an
increase of $104,000 or 21% for the year ended June 30, 1998.

                                        7
<PAGE>
         During  fiscal 1998,  the  Company's  ROAA and ROAE was .67% and 6.97%,
respectively,  compared  to .35% and 2.83% for  fiscal  1997.  ROAA and ROAE for
fiscal 1997 were  affected by the one-time  SAIF  assessment of $207,000 (net of
taxes) paid by the Company.  The Company's ROAA and ROAE for fiscal 1997 without
the SAIF assessment,  was .61% and 5.77%,  respectively.  Average  stockholders'
equity to average  assets was 9.61% during fiscal 1998 compared to 10.54% during
fiscal 1997.  The  Company's  dividend  payout ratio was 26% during  fiscal 1998
compared to 48% during fiscal 1997.

         Interest Income. Interest income increased $849,000 to $6.7 million for
the year ended June 30, 1998  compared  to $5.9  million for the year ended June
30, 1997. The increase was  attributable  primarily to interest  earned on loans
receivable and securities  available-for-sale  as a result of an increase in the
average  outstanding balance of these assets. The average outstanding balance of
loans  receivable  increased  $3.8 million to $55.0  million and the  securities
available-for-sale  increased  $5.9 million to $25.4 million during fiscal 1998.
An increase of $900,000  in the  average  outstanding  balance of the  Company's
other  interest  earning  assets also  contributed  to the  increase in interest
income.  These  increases were funded with customer  deposits and FHLB advances.
The yield on all  average  interest-earning  assets  decreased  slightly  during
fiscal 1998 to 8.00% from 8.06% during fiscal 1997.

         Interest Expense.  Interest expense increased  $619,000 to $4.0 million
for the year ended June 30, 1998 compared to $3.4 million for the ended June 30,
1997. The increase in interest  expense was primarily  attributable to increases
in the average outstanding balance of FHLB advances and deposits,  combined with
increased  rates  paid on FHLB  advances.  The  average  rate  paid on  advances
increased  by 15 basis  points to 5.69%  during  fiscal  1998 from 5.54%  during
fiscal 1997. The average rate paid on all interest-bearing liabilities increased
ten basis points to 5.04% during fiscal 1998 from 4.94% during fiscal 1997.

         Net Interest  Income.  Net interest income  increased  $230,000 to $2.7
million  in fiscal  1998  from $2.5  million  in fiscal  1997.  The ratio of the
Company's   average   interest-bearing   assets  to   average   interest-bearing
liabilities  decreased to 105.65%  during fiscal 1998 from 106.13% during fiscal
1997.  During this same period,  the Company's  interest  rate spread  decreased
slightly to 2.96% from 3.12%.

         Provision for Losses on Loans. During the year ended June 30, 1998, the
Company had a $94,000  addition to its allowance for losses on loans compared to
a $252,000  provision in fiscal 1997.  As of June 30, 1998 and June 30, 1997 the
Company's allowances for losses on loans was $348,000.

         As of June 30, 1998, 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 $922,000,  or 1.02% of total assets,
compared to $1,045,000, or 1.22% of total assets, as of June 30, 1997.

         Noninterest  Income.  Noninterest income decreased $130,000 to $308,000
for the year ended June 30, 1998 from $438,000 for the year ended June 30, 1997.
The decrease was primarily attributable to a $167,000 loss realized on the sales
of securities in fiscal 1998 compared to an $81,000 gain realized on the sale of
securities in fiscal 1997.  The loss  realized on the sale of securities  during
fiscal  1998  primarily  was the result of a $475,000  write down on an interest
only  mortgage-backed  security  resulting from a decline in fair value that was
judged to be other than  temporary.  This decline in fair value  resulted from a
sustained increase in the prepayment speeds of the underlying mortgage loans.

         The decrease in noninterest  income was partially  offset by a $110,000
increase in fees, service charges and commission,  resulting from increased fees
charged on checking  accounts and  increased  commission  income on the sales of
insurance,  annuity and mutual fund products through the wholly-owned  financial
services subsidiary of the Bank.

         Noninterest Expense.  Noninterest expense decreased $224,000,  or 9.9%,
to $2.0  million for the year ended June 30, 1998 from $2.3 million for the year
ended June 30, 1997.  The decrease  was  primarily  the result of the absence in
fiscal 1998 of the one time special  assessment  of $331,000 paid by the Company
to

                                        8
<PAGE>
recapitalize  the SAIF in fiscal 1997.  This decrease was partially  offset by a
$186,000 increase in compensation costs generally  associated with the Company's
stock-based compensation plans as a result of an increase in the Company's stock
price.

         Income Tax Expense. Income taxes increased $171,000 to $317,000 for the
year ended June 30, 1998 from $146,000 for the same period in 1997. 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.

Year 2000 Issues

         A great deal of information has been disseminated  about the widespread
computer  problems that may arise in the year 2000.  Computer  programs that can
only  distinguish  the final two digits of the year entered are expected to read
entries  for the year 2000 as the year 1900 and  compute  payment,  interest  or
delinquency  based on the wrong  date,  or are  expected to be unable to compute
payment,  interest  or  delinquency.  Rapid  and  accurate  data  processing  is
essential to the operation of the Company and the Bank.  Data processing is also
essential to most other  financial  institutions  and many other  companies.  An
internal  committee  of the  Company,  comprised of six officers and one outside
director, has been formed to address the potential risk that year 2000 poses for
the  Company and the Bank.  Like other  financial  institutions,  the Company is
heavily dependent on their computer systems. Many of the information  technology
and non-information  technology systems of the Company are already Y2K ready, or
have been  scheduled for  replacement  in on-going  system plans.  Attaining Y2K
readiness is an on-going  process for the Company and the Bank.  Management  and
the Board of Directors are committed to achieving the goal of Y2K readiness.

         Accurate data  processing is essential to the operations of the Company
and the  Bank,  and a lack of  accurate  processing  by its  vendors  (or by the
Company or the Bank) could have a  significant  adverse  impact on the Company's
financial condition and results of operations.  The Bank has been assured by its
current data  processing  service  bureaus  that their  computer  services  will
function  properly on and after January 1, 2000.  The Bank's newly selected data
processing  service bureau has advised management that it, in fact, is currently
year 2000  compliant.  The  Company and the Bank  believes  that they are taking
reasonable steps to address and remediate Y2K issues, especially with respect to
mission critical systems.  The Company has received Y2K updates from most of its
material non-information system providers, including but not limited to security
cameras,  credit/debit  card and ATM card  processors,  the vault  alarm,  check
printers, telephone systems,  participation loan servicers, and institutions the
Company or the Bank invests  through or with,  and based on these updates do not
anticipate any significant Y2K issues.

         While the Company and the Bank have undertaken  significant  efforts to
assess,  remediate and test their  technical  systems to address Y2K  processing
issues, they are also developing  contingency plans. These contingency plans are
intended to provide  alternative  processes  and actions in the event of systems
malfunction  or  failures.  The Bank is  required  to follow  Federal  Financial
Institutions  Examination  Council  guidance  advising two levels of contingency
planning - remediation and  business-resumption.  Remediation  contingency plans
address the actions to be taken if remediation  efforts fall behind  schedule or
appear  in  jeopardy  of  not  delivering  a Y2K  ready  system  when  required.
Business-resumption contingency plans address the actions that would be taken if
key business processes could not be performed in the normal manner upon entering
the Y2K due to system or third party failures.  We have been  communicating with
the Bank's  vendors to assess their  progress in  evaluating  their  systems and
implementing  any  corrective  measures  required by them to be prepared for the
year 2000.  Year 2000 readiness  request  letters have also been sent to certain
borrowers of the Bank.  These  borrowers  were  selected  based on the aggregate
amounts owed to the Bank, the type of loans outstanding,  and the perceived Year
2000  risk  based on  management's  knowledge  of the loan  customers  and their
operations.  To date, the Bank has not been advised by such parties that they do
not have plans in place to address and correct  the issues  associated  with the
year 2000 problem; however, no assurance can be given as to the adequacy of such
plans or to the timeliness of their

                                        9
<PAGE>
implementation. The Company will continue to monitor the Y2K continuity progress
of such  customers  and  third  parties  through  1999  and  into  2000 and work
appropriately to address any problems which may arise.

         The  Company and the Bank have  defined  remediation  contingency  plan
requirements that are intended to provide  alternative  processes and actions to
address failed or unsuccessful  remediation  efforts.  The first priority of the
Company and the Bank is their core processes and mission-critical systems.

         In addition to expenses  related to our own systems,  the Company could
incur losses if loan  payments are delayed due to year 2000  problems  affecting
any of our  significant  borrowers  or  impairing  the payroll  systems of large
employers  in the  Company's  market  area.  The  Company  is  aware  there is a
potential for heavy  currency  demand by our  customers  which may occur in late
1999 and early 2000.  The Company has  addressed  this issue in its  contingency
plans.



                                       10
<PAGE>
Average Balances, Interest Rates and Yields

         The following table presents for the periods indicated the total dollar
amount of interest  income earned on average  interest-earning  assets and total
dollar amount of interest expense paid on average interest-bearing  liabilities,
as well as their  resultant  yields and rates,  respectively.  No tax equivalent
adjustments  were made.  All  average  balances  are monthly  average  balances.
Non-accruing  loans  have been  included  in the table as loans  carrying a zero
yield.
<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                     -----------------------------------------------------------------------------------------------
                                                  1999                          1998                               1997
                                     --------------------------------  -----------------------------   -----------------------------
                                       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).................     $55,243    $4,597     8.32%    $55,015    $4,745      8.63%     $51,166    $4,408    8.62%
 Securities available-for-sale.......      21,020     1,340     6.38      25,394     1,699      6.69       19,445     1,332    6.85
 Other interest-earning assets.......       3,002       178     5.93       2,786       222      7.97        1,814       108    5.96
 FHLB stock..........................       1,203        77     6.40       1,143        78      6.82          666        47    7.03
                                         --------    ------              -------   -------                -------    ------
  Total interest-earning assets(1)...      80,468     6,192     7.70      84,338     6,744      8.00       73,091     5,895    8.06
                                          -------    ------              -------     -----                 ------     -----

Interest-Bearing Liabilities:
 Savings deposits....................      19,938       857     4.30      17,118       743      4.34       15,829       701    4.43
 Money market deposits...............         540        13     2.41         747        18      2.41          935        22    2.42
 Demand and NOW deposits.............       6,905       132     1.91       5,863       104      1.77        5,371        93    1.66
 Certificates of deposit.............      31,031     1,635     5.27      33,989     1,899      5.59       33,759     1,866    5.53
 FHLB Advances.......................      19,115     1,005     5.26      22,109     1,257      5.69       12,978       720    5.54
                                         --------    ------             --------  --------                -------   -------
   Total interest-bearing liabilities     $77,529     3,642     4.70    $ 79,826     4,021      5.04      $68,872     3,402    4.94
                                          -------    ------             --------   -------                -------   -------

Net interest income..................                $2,550                         $2,723                           $2,493
                                                     ======                         ======                           ======

Net interest rate spread.............                           3.00%                         2.96%                            3.12%
                                                                                              ====                             ====

Net interest-earning assets..........      $2,939                       $  4,512                          $ 4,219
                                           ======                       ========                          =======

Net interest margin(2)...............                           3.17%                         3.23%                            3.41%
                                                                ====                          ====                             ====

Average interest-earning assets to
 average interest-bearing liabilities               103.79%                         105.65%                                  106.13%
                                                    ======                          ======                                   ======
</TABLE>
-------------------------------

(1)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     loss reserves

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

                                       11
<PAGE>
Rate/Volume Analysis of the Net Interest Income

         The following  table  presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning  assets and
interest-bearing  liabilities.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e.,  changes in volume multiplied by old rate) and (ii)
changes in rate (i.e.,  changes in rate multiplied by old volume).  For purposes
of this table,  changes  attributable  to both rate and volume  which  cannot be
segregated have been allocated  proportionately  to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
                                                                                         Year Ended June 30,
                                                            ------------------------------------------------------------------------
                                                                         1999 vs. 1998                         1998 vs. 1997
                                                            ------------------------------------------------------------------------
                                                                  Increase                              Increase
                                                                 (Decrease)                            (Decrease)
                                                                   Due to              Total             Due to             Total
                                                            -------------------      Increase      -------------------     Increase
                                                            Volume        Rate      (Decrease)     Volume        Rate     (Decrease)
                                                            ------        ----      ----------     ------        ----     ----------
                                                                                          (In Thousands)
<S>                                                          <C>          <C>          <C>          <C>          <C>          <C>
Interest-earning assets:
  Loans receivable ...................................       $   4        $(152)       $(148)       $ 408        $ (71)       $ 337
  Securities available-for-sale ......................        (275)         (84)        (359)         355           12          367
  Other interest-earning assets ......................         (64)          20          (44)         107            7          114
  FHLB Stock .........................................          --           (1)          (1)          32           (1)          31
                                                             -----        -----        -----        -----        -----        -----

    Total interest-earning assets ....................       $(335)       $(217)       $(552)       $ 902        $ (53)       $ 849
                                                             =====        =====                     =====        =====        -----

Interest-bearing liabilities:
  Savings deposits ...................................         142          (28)         114           28           14           42
  Money market deposits ..............................          (5)          --           (5)          (3)          (1)          (4)
  Demand and NOW deposits ............................          36           (8)          28           (2)          13           11
  Certificates of deposits ...........................        (184)         (80)        (264)          40           (7)          33
  FHLB advances ......................................        (212)         (40)        (252)         507           30          537
                                                             -----        -----        -----        -----        -----        -----

    Total interest-bearing liabilities ...............       $(223)       $(156)       $(379)       $ 570        $  49        $ 619
                                                             =====        =====        -----        =====        =====        -----

Net interest income.....................                                               $(173)                                 $ 230
                                                                                       =====                                  =====
</TABLE>

                                       12
<PAGE>
Interest Rate Spread

         The  following  table  sets  forth  the  weighted   average  yields  on
interest-earning   assets,  the  weighted  average  rates  on   interest-bearing
liabilities  and the interest rate spread  between  weighted  average yields and
rates at the end of each of the years  presented.  Non-accruing  loans have been
included in the table as carrying a zero yield.
<TABLE>
<CAPTION>
                                                               At June 30,
                                               -------------------------------------
                                                      1999        1998         1997
                                               -------------------------------------
<S>                                                   <C>         <C>         <C>
Weighted average yield on:

 Loans receivable, net(1) ..................          8.14%       8.54%       8.65%
 Securities available-for-sale .............          6.37        6.98        6.99
 Other interest-earning assets .............          4.85        5.54        5.45
 FHLB stock ................................          6.25        6.92        7.00
   Combined weighted average yield on
   interest-earning assets .................          7.52        7.95        8.00

Weighted average rate paid on:

 Savings deposits ..........................          4.17        4.42        4.24
 Money market deposits .....................          2.37        2.37        2.43
 Demand and NOW deposits ...................          1.81        1.87        1.39
 Certificates of Deposit ...................          5.12        5.57        5.62
 FHLB advances .............................          5.07        5.24        5.71
   Combined weighted average rate paid
   on interest-bearing liabilities .........          4.49        4.90        4.93

 Spread ....................................          3.03%       3.05%       3.07%
</TABLE>
-----------------
(1)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     loan loss reserves.


Asset/Liability Management

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

                                       13
<PAGE>
         The  Company's  cost of funds are  typically  responsive  to changes in
interest rates due to the relatively short-term nature of its deposit portfolio.
Consequently,  the  results  of  operations  are  influenced  by the  levels  of
short-term  interest  rates.  The Company  offers a range of  maturities  on its
deposit products at competitive  rates and monitors the maturities on an ongoing
basis.

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

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

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

         The OTS issued a regulation  which uses a net market value  methodology
to measure the interest  rate risk  exposure of thrift  institutions.  Under OTS
regulations,  an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an  amount  not  exceeding  2% of  the  present  value  of  its  assets.  Thrift
institutions  with greater than  "normal"  interest  rate  exposure  must take a
deduction  from their total  capital  available to meet their risk based capital
requirement.  The amount of that deduction is one-half of the difference between
(a) the institution's  actual calculated  exposure to a 200 basis point interest
rate increase or decrease  (whichever  results in the greater pro forma decrease
in NPV) and (b) its "normal"  level of exposure which is 2% of the present value
of its assets. The regulation,  however, will not become effective until the OTS
evaluates the process by which savings  associations may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed.  Notwithstanding the foregoing and the fact that the Bank, due to its
asset size and level of  risk-based  capital,  is exempt from this  requirement,
utilizing this measuring  concept,  a deduction to risk-based capital would have
been  required  as of June  30,  1999 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.

                                       14
<PAGE>
         Presented  below,  as of June 30,  1999,  is an  analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point  increments,  up and down
300 basis points and compared to Board policy limits and in accordance  with OTS
regulations.  Such limits have been established with consideration of the dollar
impact of various rate changes and the Bank's strong capital position.


         Change in           Board Limit       At June 30,
       Interest Rate       (min NPV ratios)       1999
       (Basis Points)          % Change         %Change
       --------------          --------         -------

           +300                   5.00%          7.78%
           +200                   6.00           8.81
           +100                   6.75           9.62
              0                   6.75          10.11
           -100                   6.75           9.31
           -200                   6.00           8.23
           -300                   5.00           7.50


         Management  reviews the OTS  measurements  on a quarterly  basis.  In a
declining interest rate environment,  at June 30, 1998, the Bank's interest rate
risk was in excess of the Board's prescribed guidelines.  The Bank, in an effort
to reduce its present  interest rate risk exposure and in order to bring its NPV
within  Board policy  limits,  has  eliminated  and is  continuing  to eliminate
certain investments which have proven to be more interest rate sensitive than is
currently  acceptable  to the Bank. At June 30, 1999,  the Bank's  interest rate
risk was within the Board's prescribed guidelines.

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

Liquidity and Capital Resources

         The OTS  requires  minimum  levels of liquid  assets.  OTS  regulations
presently require the Bank to maintain an average daily balance of liquid assets
(United  States  treasury and federal agency  securities  and other  investments
having  maturities  of five years or less)  equal to at least 4.0% of the sum of
its average daily balance of net  withdrawable  deposit  accounts and borrowings
payable in one year or less. Such  requirements may be changed from time to time
by the  OTS to  reflect  changing  economic  conditions.  Such  investments  are
intended to provide a source of relatively  liquid funds upon which the Bank may
rely, if necessary,  to fund deposit  withdrawals and other  short-term  funding
needs.  The Bank has  historically  maintained its liquidity  ratio in excess of
that requirement. The Bank's liquidity ratios were 11.5%, 10.4% and 7.1% at June
30, 1999, 1998 and 1997, respectively.

         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

                                       15
<PAGE>
beyond its internal  ability to generate such funds it has additional  borrowing
capacity  with the FHLB of Des Moines and  collateral  eligible  for  repurchase
agreements.

         The Company  principally  uses its liquidity  resources to meet ongoing
commitments,  to fund maturing  certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments,  to maintain liquidity,
and to meet other  operating  needs.  At June 30,  1999,  the  Company  had $1.4
million  of  loan  commitments.  The  Company  anticipates  that  it  will  have
sufficient  funds available to meet  outstanding  loan  commitments.  Management
believes  that loan  repayments  and other  sources of funds will be adequate to
meet and exceed the Bank's foreseeable short- and long-term liquidity needs.

         Certificates  of deposit  scheduled to mature in a year or less at June
30, 1999 totaled $18.3 million or 64.8% of the Company's  total  certificates of
deposit. Based on historical experience,  management believes that a significant
portion  of  such  deposits  will  remain  with  the  Company.  There  can be no
assurance,  however,  that the Company can retain all such deposits. At June 30,
1999, the Company had  outstanding  borrowings of $16.6 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $21.7 million.

         The primary investing activities of the Company include the origination
of loans and the purchase of mortgage-backed securities. At June 30, 1999, these
assets accounted for over 81.7% of the Company's total assets.  Such origination
and  purchases  are  funded  primarily  from  loan  repayments,   repayments  of
mortgage-backed and investment  securities,  FHLB advances, net income and, to a
lesser extent, increases in deposits.

         At June 30,  1999,  the  Bank had  tangible  and core  capital  of $5.8
million, or 6.9% of adjusted total assets,  which was approximately $4.5 million
and $2.4 million above the minimum requirements of 1.5% and 4.0%,  respectively,
of the adjusted  total assets in effect on that date. At June 30, 1999, the Bank
had total  risk-based  capital of $6.1 million  (including  $5.8 million in core
capital),  or 12.6% of  risk-weighted  assets of $48.4 million.  This amount was
$2.2  million  above the 8%  requirement  in effect  on that  date.  The Bank is
presently in compliance with its regulatory capital requirements.

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 in terms of historical  dollars  without  considering  changes in the
relative purchasing power of money over time because of inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most  industrial  companies,  virtually all of the assets and liabilities of the
Company  are  monetary  in  nature.  As a  result,  interest  rates  have a more
significant  impact on the  Company's  performance  than the  effects of general
levels  of  inflation.  Interest  rates  do not  necessarily  move  in the  same
direction or in the same magnitude as the prices of goods and services.

Effect of New Accounting Standards

         Effective  July 1, 1998,  the Company  adopted SFAS No. 130,  Reporting
Comprehensive  Income,  SFAS No. 130 establishes the standards for the reporting
and display of comprehensive income in the financial  statements.  Comprehensive
income  represents  net  earnings  and  certain  amounts  reported  directly  in
stockholders'   equity,   such   as  the   net   unrealized   gain  or  loss  on
available-for-sale securities.

         Effective  July 1, 1998, the Company  adopted SFAS No. 132,  Employers'
Disclosures  about  Pensions  and Other  Postretirement  Benefits.  SFAS No. 132
revises  the  disclosure  requirements  for  pension  and other  post-retirement
benefits plans.

         SFAS  No.  133,  Accounting  for  Derivative  Instruments  and  Hedging
Activities, and SFAS No. 137, an amendment to SFAS No. 133 will be effective for
the Company  beginning  July 1, 2001.  Management is  evaluating  the impact the
adoption  of  SFAS  No.  133  and  SFAS  No.  137  will  have  on the  Company's
consolidated financial statements and expects to adopt SFAS No. 133 and SFAS No.
137 when required.

                                       16
<PAGE>
                          Independent Auditors' Report



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


     We have audited the  accompanying  consolidated  balance  sheets of Horizon
     Financial  Services  Corporation  and  subsidiaries as of June 30, 1999 and
     1998 and the related  consolidated  statements  of  operations,  changes in
     stockholders'  equity and  comprehensive  income and cash flows for each of
     the years in the three-year period ended June 30, 1999. 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  generally  accepted  auditing
     standards.  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, 1999 and
     1998 and the results of their  operations  and their cash flows for each of
     the years in the  three-year  period ended June 30, 1999,  izzn  conformity
     with generally accepted accounting principles.

                                   /s/KPMG LLP

Des Moines, Iowa
July 28, 1999, except for
note 17, which is as
of August 23, 1999

                                       17
<PAGE>
<TABLE>
<CAPTION>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                           Consolidated Balance Sheets

                             June 30, 1999 and 1998

                                      Assets                            1999               1998
                                                                    ------------       ------------
<S>                                                                 <C>                <C>
Cash and cash equivalents ....................................      $  7,917,020          6,366,619
Securities available-for-sale (note 2) .......................        17,096,985         23,921,718
Loans receivable, net (notes 3 and 4) ........................        56,066,399         55,996,418
Real estate (note 5) .........................................           270,779            190,402
Stock in Federal Home Loan Bank, at cost .....................         1,202,500          1,202,500
Office property and equipment, net (note 6) ..................         1,089,053          1,126,516
Accrued interest receivable (note 7) .........................           522,121            683,120
Deferred tax asset (note 10) .................................           254,000            405,541
Income tax receivable (note 10) ..............................           522,699               --
Prepaid expenses and other assets ............................            81,646             53,911
                                                                    ------------       ------------

             Total assets ....................................      $ 85,023,202         89,946,745
                                                                    ============       ============

                       Liabilities and Stockholders' Equity

Deposits (note 8) ............................................      $ 59,576,232         60,144,866
Advances from Federal Home Loan Bank (note 9) ................        16,606,176         20,038,174
Advance payments by borrowers for taxes and insurance ........           399,830            407,050
Accrued income taxes .........................................              --              291,492
Accrued expenses and other liabilities .......................           380,617            577,343
                                                                    ------------       ------------

             Total liabilities ...............................        76,962,855         81,458,925
                                                                    ------------       ------------
<PAGE>
<CAPTION>
                                                                        1999               1998
                                                                    ------------       ------------
<S>                                                                 <C>                <C>

Stockholders' equity:
   Preferred stock, $.01 par value; authorized 250,000 shares;
      none issued ............................................              --                 --
   Common stock, $.01 par value; 1,500,000 shares authorized;
      issued and outstanding 1,046,198 shares at 1999 and 1998            10,462             10,462
   Additional paid-in capital ................................         4,996,761          4,894,744
   Retained earnings, substantially restricted (note 12) .....         4,804,455          5,730,257
   Treasury stock, at cost (171,136 and 166,256 shares in 1999
      and 1998, respectively) ................................        (1,229,571)        (1,185,924)
   Unearned employee stock ownership plan shares (note 11) ...           (65,503)          (129,205)
   Unearned recognition and retention plan shares (note 11) ..              --              (11,439)
   Accumulated other comprehensive income - net unrealized
      loss on securities available for sale ..................          (456,257)          (821,075)
                                                                    ------------       ------------

             Total stockholders' equity ......................         8,060,347          8,487,820

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

             Total liabilities and stockholders' equity ......      $ 85,023,202         89,946,745
                                                                    ============       ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
<TABLE>
<CAPTION>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Operations

                    Years ended June 30, 1999, 1998, and 1997


                                                                              1999              1998              1997
                                                                          -----------       -----------       -----------
<S>                                                                       <C>               <C>               <C>
Interest income:
   Loans ...........................................................      $ 4,597,470         4,744,988         4,408,308
   Investment securities available-for-sale ........................        1,339,629         1,699,038         1,331,322
   Other investment income .........................................          255,272           300,494           154,960
                                                                          -----------       -----------       -----------

             Total interest income .................................        6,192,371         6,744,520         5,894,590
                                                                          -----------       -----------       -----------

Interest expense:
   Deposits (note 8) ...............................................        2,636,943         2,763,850         2,682,335
   Advance from Federal Home Loan Bank .............................        1,005,569         1,257,447           719,415
                                                                          -----------       -----------       -----------

             Total interest expense ................................        3,642,512         4,021,297         3,401,750
                                                                          -----------       -----------       -----------

             Net interest income ...................................        2,549,859         2,723,223         2,492,840

Provision for losses on loans (note 4) .............................          138,540            94,000           252,110
                                                                          -----------       -----------       -----------

             Net interest income after provision for losses on loans        2,411,319         2,629,223         2,240,730
                                                                          -----------       -----------       -----------

Noninterest income:
   Fees, service charges and commissions ...........................          497,012           447,871           338,107
   (Loss) gain on sale of securities, net ..........................       (2,038,667)         (166,959)           81,403
   Other ...........................................................            8,573            26,731            18,629
                                                                          -----------       -----------       -----------

             Total noninterest income (loss) .......................       (1,533,082)          307,643           438,139
                                                                          -----------       -----------       -----------


<PAGE>
<CAPTION>
                                                                              1999              1998              1997
                                                                          -----------       -----------       -----------
<S>                                                                       <C>               <C>               <C>
Noninterest expense:
   Compensation, payroll taxes and employee benefits (note 11) .....        1,210,041         1,237,633         1,051,597
   Advertising .....................................................           71,750            66,850            60,447
   Office property and equipment ...................................          333,336           317,385           319,765
   Federal insurance premiums and special assessments (note 13) ....           44,197            35,816           404,489
   Data processing services ........................................          155,169           117,090           108,337
   Other real estate expense .......................................           35,317            44,777            52,701
   Other ...........................................................          266,798           211,231           257,741
                                                                          -----------       -----------       -----------

             Total noninterest expense .............................        2,116,608         2,030,782         2,255,077
                                                                          -----------       -----------       -----------

             (Loss) earnings before taxes on income (benefit) ......       (1,238,371)          906,084           423,792

Taxes on income (benefit) (note 10) ................................         (466,600)          316,700           145,300
                                                                          -----------       -----------       -----------

             Net (loss) earnings ...................................      $  (771,771)          589,384           278,492
                                                                          ===========       ===========       ===========

Basic (loss) earnings per common share .............................      $     (0.90)             0.71              0.34
                                                                          ===========       ===========       ===========

Diluted (loss) earnings per common share ...........................      $     (0.90)             0.69              0.33
                                                                          ===========       ===========       ===========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
<TABLE>
<CAPTION>
                                                     HORIZON FINANCIAL SERVICES
                                                    CORPORATION AND SUBSIDIARIES

                         Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income

                                              Years ended June 30, 1999, 1998, and 1997


                                                                              Additional                                  Unearned
                                                     Preferred     Common      paid-in       Retained      Treasury         ESOP
                                                       stock        stock      capital       earnings       stock          shares
                                                    ----------   ----------   ----------    ----------    ----------    ----------
<S>                                                 <C>          <C>          <C>           <C>           <C>           <C>
Balance at June 30, 1996 .......................    $     --          5,231    4,752,930     5,157,486    (1,022,921)     (260,303)

Comprehensive income:
     Net earnings ..............................          --           --           --         278,492          --            --
     Unrealized gains (losses) on securities
         available-for-sale ....................          --           --           --            --            --            --
     Less: reclassification adjustment for net
         realized (gains) losses included in net
         income, net of tax ....................          --           --           --            --            --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

         Total comprehensive income ............          --           --           --         278,492          --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

Dividends declared ($.16 per share)(1) .........          --           --           --        (130,032)         --            --
Treasury stock acquired ........................          --           --           --            --        (337,354)         --
ESOP shares allocated ..........................          --           --           --            --            --          66,505
Stock appreciation of allocated ESOP shares ....          --           --         42,470          --            --            --
Amortization of recognition and retention plan .          --           --           --            --            --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

Balance at June 30, 1997 .......................          --          5,231    4,795,400     5,305,946    (1,360,275)     (193,798)

Comprehensive income:
     Net earnings ..............................          --           --           --         589,384          --            --
     Unrealized gains (losses) on securities ...
         available-for-sale ....................          --           --           --            --            --            --
     Less: reclassification adjustment for net
         realized (gains) losses included in net
         income, net of tax ....................          --           --           --            --            --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

         Total comprehensive income ............          --           --           --         589,384          --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

Dividends declared ($.18 per share) ............          --           --           --        (144,982)         --            --
Two-for-one stock dividend .....................          --          5,231         --          (5,231)         --            --
Stock options exercised ........................          --           --             94       (14,860)      174,351          --
ESOP shares allocated ..........................          --           --           --            --            --          64,593
Stock appreciation of allocated ESOP shares ....          --           --         99,250          --            --            --
Amortization of recognition and retention plan .          --           --           --            --            --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

Balance at June 30, 1998 .......................          --         10,462    4,894,744     5,730,257    (1,185,924)     (129,205)

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

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

Dividends declared ($.18 per share) ............          --           --           --        (153,963)         --            --
Treasury stock acquired ........................          --           --           --            --         (44,375)         --
Stock options exercised ........................          --           --           --             (68)          728          --
ESOP shares allocated ..........................          --           --           --            --            --          63,702
Stock appreciation of allocated ESOP shares ....          --           --         89,450          --            --            --
Tax benefit related
     to non-qualified recognition and
     retention plan ............................          --           --         12,567          --            --            --
Amortization of recognition and retention plan .          --           --           --            --            --            --
                                                    ----------   ----------   ----------    ----------    ----------    ----------

Balance at June 30, 1999 .......................    $     --         10,462    4,996,761     4,804,455    (1,229,571)      (65,503)
                                                    ==========   ==========   ==========    ==========    ==========    ==========
<PAGE>
<CAPTION>
                                                      Recognition       Net unrealized
                                                         and            gain (loss) on
                                                       retention     securities available
                                                         plan              for sale             Total
                                                      ----------     --------------------     ----------
<S>                                                   <C>            <C>                      <C>
Balance at June 30, 1996 .......................         (83,871)          (158,326)           8,390,226

Comprehensive income:
     Net earnings ..............................            --                 --                278,492
     Unrealized gains (losses) on securities
         available-for-sale ....................            --               96,175               96,175
     Less: reclassification adjustment for net
         realized (gains) losses included in net
         income, net of tax ....................            --              (30,037)             (30,037)
                                                      ----------         ----------           ----------

         Total comprehensive income ............            --               66,138              344,630
                                                      ----------         ----------           ----------

Dividends declared ($.16 per share)(1) .........            --                 --               (130,032)
Treasury stock acquired ........................            --                 --               (337,354)
ESOP shares allocated ..........................            --                 --                 66,505
Stock appreciation of allocated ESOP shares ....            --                 --                 42,470
Amortization of recognition and retention plan .          36,216               --                 36,216
                                                      ----------         ----------           ----------

Balance at June 30, 1997 .......................         (47,655)           (92,188)           8,412,661

Comprehensive income:
     Net earnings ..............................            --                 --                589,384
     Unrealized gains (losses) on securities ...                                                    --
         available-for-sale ....................            --             (969,183)            (969,183)
     Less: reclassification adjustment for net
         realized (gains) losses included in net
         income, net of tax ....................            --              240,296              240,296
                                                      ----------         ----------           ----------

         Total comprehensive income ............            --             (728,887)            (139,503)
                                                      ----------         ----------           ----------

Dividends declared ($.18 per share) ............            --                 --               (144,982)
Two-for-one stock dividend .....................            --                 --                   --
Stock options exercised ........................            --                 --                159,585
ESOP shares allocated ..........................            --                 --                 64,593
Stock appreciation of allocated ESOP shares ....            --                 --                 99,250
Amortization of recognition and retention plan .          36,216               --                 36,216
                                                      ----------         ----------           ----------

Balance at June 30, 1998 .......................         (11,439)          (821,075)           8,487,820

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

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

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

Balance at June 30, 1999 .......................            --             (456,257)           8,060,347
                                                      ==========         ==========           ==========
</TABLE>

(1)  Restated to reflect the  two-for-one  stock split effected in the form of a
     stock dividend on November 10, 1997.

See accompanying notes to consolidated financial statements.

                                       20
<PAGE>
<TABLE>
<CAPTION>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                    Years ended June 30, 1999, 1998, and 1997


                                                                                       1999            1998           1997
                                                                                  ------------    ------------    ------------
<S>                                                                               <C>             <C>             <C>
Cash flows from operating activities:
   Net (loss) earnings ........................................................   $   (771,771)        589,384         278,492
   Adjustments to reconcile net (loss) income to net cash
      provided by operating activities:
        Depreciation ..........................................................        147,461         147,585         163,658
        Amortization of fees, premiums, and accretion of discounts, net .......         (7,636)       (179,225)         23,807
        Provision for losses on loans .........................................        138,540          94,000         252,111
        Loans originated for sale .............................................     (9,047,665)     (6,478,320)       (486,300)
        Proceeds on sales of loans ............................................      8,616,722       6,076,820         349,500
        Amortization of stock compensation plans ..............................        177,158         200,059         145,191
        Loss (gain) on sale of securities .....................................        547,667        (308,041)        (81,403)
        Impairment losses on securities .......................................      1,491,000         475,000            --
        Gain on sale of fixed assets ..........................................         (8,573)           --              --
        Decrease (increase) in accrued interest receivable ....................        160,999        (128,881)        (40,610)
        (Decrease) increase in accrued taxes payable and deferred taxes .......       (877,419)        178,216          43,576
        Other, net ............................................................       (209,838)        271,281         115,687
                                                                                  ------------    ------------    ------------

            Net cash provided by operating activities .........................        356,645         937,878         763,709
                                                                                  ------------    ------------    ------------

Cash flows from investing activities:
   Securities available-for-sale:
      Purchases ...............................................................     (6,413,852)    (23,698,089)    (12,835,616)
      Proceeds from sale ......................................................      6,739,179      18,838,215       4,434,596
      Proceeds from maturity and principal collected ..........................      5,047,962       4,780,581       1,672,003
   Loans to customers, net ....................................................        222,422      (3,495,633)     (3,309,738)
   Proceeds from sale of real estate ..........................................          5,000         360,288          65,233
   Purchase of investment real estate .........................................       (100,000)           --              --
   Purchase of Federal Home Loan Bank stock ...................................           --          (246,900)       (396,800)
   Proceeds from sale of fixed assets .........................................         13,582            --              --
   Purchase of office property and equipment, net .............................       (115,007)       (192,088)       (112,356)
                                                                                  ------------    ------------    ------------

            Net cash provided by (used in) investing activities ...............      5,399,286      (3,653,626)    (10,482,678)
                                                                                  ------------    ------------    ------------

Cash flows from financing activities:
   Increase in customer deposit accounts, net .................................       (568,634)      2,503,494       2,882,405
   (Decrease) increase in advance payments by borrowers for taxes and insurance         (7,220)          6,387          14,391
   Proceeds from advances from Federal Home Loan Bank .........................      6,650,000      27,000,000      15,000,000
   Principal payments on advances from Federal Home Loan Bank .................    (10,081,998)    (26,063,359)     (5,559,738)
   Payment of dividends .......................................................       (153,963)       (144,982)       (130,031)
   Exercise of stock options ..................................................            660         159,585            --
   Treasury stock acquired ....................................................        (44,375)           --          (337,354)
                                                                                  ------------    ------------    ------------

            Net cash (used in) provided by financing activities ...............     (4,205,530)      3,461,125      11,869,673
                                                                                  ------------    ------------    ------------

            Net increase in cash and cash equivalents .........................      1,550,401         745,377       2,150,704

Cash and cash equivalents at beginning of year ................................      6,366,619       5,621,242       3,470,538
                                                                                  ------------    ------------    ------------

Cash and cash equivalents at end of year ......................................   $  7,917,020       6,366,619       5,621,242
                                                                                  ============    ============    ============

Supplemental disclosures of cash flow information:
   Cash paid for interest .....................................................   $  3,752,446       3,794,411       3,336,641
   Cash paid for taxes ........................................................        415,750          91,102         134,941
   Transfers of loans to real estate acquired through foreclosures ............           --              --           105,330
                                                                                  ============    ============    ============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       21
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

  (1)   Summary of Significant Accounting Policies

        Description of the Business and Concentration of Credit

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

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

        Consolidation and Basis of Presentation

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

        The preparation of consolidated  financial statements in conformity with
        generally accepted  accounting  principles  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.

        Regulatory Capital

        The Bank is  required  by the  Office  of  Thrift  Supervision  (OTS) to
        maintain  prescribed levels of regulatory capital. At June 30, 1999, the
        requirements   were  met,  and   management   anticipates   meeting  the
        requirements at June 30, 2000.

        Cash and Cash Equivalents

        For purposes of the statements of cash flows, the Company  considers all
        short-term  investments  with a maturity of three months or less at date
        of purchase to be cash  equivalents.  Cash and cash equivalents  include
        interest-earning  deposits of $5,000,000 and $3,581,000 at June 30, 1999
        and 1998, respectively.

                                       22
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        Earnings Per Share

        Basic earnings per share,  pursuant to Statement of Financial Accounting
        Standards  (SFAS) No. 128,  Earnings Per Share, is determined  using net
        income and weighted  average  common  shares  outstanding,  decreased by
        unearned  employee stock ownership plan (ESOP) shares.  Diluted earnings
        per share, as defined by SFAS No. 128 is computed by dividing net income
        by the weighted average common shares, decreased by unearned ESOP shares
        and increased by assumed  incremental common shares issued. All earnings
        per share data has been restated to reflect the two-for-one  stock split
        effected in the form of a stock  dividend on November 10, 1997.  Amounts
        used in the  determination  of basic and diluted  earnings per share for
        the years ended June 30, 1999, 1998, and 1997 are shown in table below.
<TABLE>
<CAPTION>
                                                1999        1998         1997
                                             ---------    ---------    ---------
<S>                                          <C>          <C>          <C>
Net (loss) earnings ......................   $(771,771)     589,384      278,492
                                             =========    =========    =========

Weighted average common shares outstanding     879,151      862,720      863,442
Less - unearned ESOP shares ..............     (18,768)     (31,279)     (44,502)
                                             ---------    ---------    ---------

             Weighted average common
               shares - basic ............     860,383      831,441      818,940

Assumed incremental common shares issued
   upon exercise of stock options ........        --         29,425       24,410
                                             ---------    ---------    ---------

             Weighted average common
               shares - diluted ..........     860,383      860,866      843,350
                                             =========    =========    =========
</TABLE>

        Securities Available-for-sale

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

        Securities  available-for-sale are recorded at fair value. The aggregate
        unrealized  gains or losses,  net of the effect of taxes on income,  are
        recorded as a separate  component  of other  comprehensive  income until
        realized.   Discounts   and  premiums   are   accreted  and   amortized,
        respectively,  over the term of the security except for  mortgage-backed
        and related securities and 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.

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

                                       23
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        Allowance for Losses on Loans

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

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

        Loans Receivable

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

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

        Loan Origination Fees and Related Costs

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

        Real Estate

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

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

                                       24
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        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
        (see  note  3).  Each  customer's  creditworthiness  is  evaluated  on a
        case-by-case  basis.  The  amount  of  collateral  obtained,  if  deemed
        necessary by the Bank, upon extension of credit is based on management's
        credit evaluation of the counterparty.

        Office Property and Equipment

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

        Maintenance  and repairs are charged  against  income.  Betterments  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
        profit or loss from such transactions is credited or charged to income.

        Treasury Stock

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

        Taxes on Income

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

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

                                       25
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        Stock Option Plan

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

        Fair Value of Financial Instruments

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

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

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

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

              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.

                                       26
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

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

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

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

        Effect of New Accounting Standards

        Effective  July 1, 1998,  the Company  adopted  SFAS No. 130,  Reporting
        Comprehensive  Income.  SFAS No. 130  establishes  the standards for the
        reporting  and  display  of   comprehensive   income  in  the  financial
        statements.  Comprehensive  income  represents  net earnings and certain
        amounts  reported  directly  in  stockholders'  equity,  such as the net
        unrealized gain or loss on available-for-sale securities.

        Effective  July 1, 1998,  the Company  adopted SFAS No. 132,  Employers'
        Disclosures about Pensions and Other Postretirement  Benefits.  SFAS No.
        132  revises  the   disclosure   requirements   for  pension  and  other
        postretirement benefit plans.

        SFAS  No.  133,  Accounting  for  Derivative   Instruments  and  Hedging
        Activities,  and SFAS No.  137,  an  amendment  to SFAS No.  133 will be
        effective  for  the  Company  beginning  July  1,  2001.  Management  is
        evaluating the impact the adoption of SFAS No. 133 and SFAS No. 137 will
        have on the Company's  consolidated  financial statements and expects to
        adopt SFAS No. 133 and SFAS No. 137 when required.

                                       27
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

  (2)   Securities Available-for-sale

        Securities available-for-sale at June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
                                                                                       Gross             Gross
                                                                   Amortized         unrealized        unrealized           Fair
                  Description                                         cost             gains             losses             value
-------------------------------------------------------------      -----------       -----------       -----------       -----------
<S>                                                                <C>               <C>               <C>               <C>
1999:
   FHLB bonds - due beyond one year,
      but within ten years .................................       $   500,000              --              56,250           443,750
   FHLB bonds - due beyond five years,
      but within ten years .................................           500,000              --             100,000           400,000
   Small Business Administration guaranteed
      loan participation certificates ......................           731,356             7,336              --             738,692
   Mortgage-backed and related securities:
      Mortgage-backed securities ...........................         1,774,515              --              42,370         1,732,145
      Collateralized mortgage obligations ..................        10,807,364            87,223           193,564        10,701,023
   Mutual funds ............................................         1,127,365              --               2,216         1,125,149
   Equity securities .......................................         1,133,606             6,550           138,103         1,002,053
                                                                   -----------       -----------       -----------       -----------

                                                                    16,574,206           101,109           532,503        16,142,812

   Stripped mortgage-backed securities:
      Principal only .......................................             8,478              --               4,041             4,437
      Interest only ........................................         1,246,544              --             296,808           949,736
                                                                   -----------       -----------       -----------       -----------

                                                                   $17,829,228           101,109           833,352        17,096,985
                                                                   ===========       ===========       ===========       ===========

1998:
   FHLB bonds - due beyond five years,
      but within ten years .................................       $ 1,000,000              --             131,250           868,750
   Small Business Administration guaranteed
      loan participation certificates ......................           955,787            16,679              --             972,466
   Mortgage-backed and related securities:
      Mortgage-backed securities ...........................           672,987              --               5,920           667,067
      Collateralized mortgage obligations ..................        11,624,160           101,948             3,089        11,723,019
   Mutual funds ............................................         1,000,000              --                --           1,000,000
   Equity securities .......................................         1,430,056            82,300            83,969         1,428,387
                                                                   -----------       -----------       -----------       -----------

                                                                    16,682,990           200,927           224,228        16,659,689

   Stripped mortgage-backed securities:
      Principal only .......................................            10,823              --               4,754             6,069
      Interest only ........................................         8,537,520            13,807         1,295,367         7,255,960
                                                                   -----------       -----------       -----------       -----------

                                                                   $25,231,333           214,734         1,524,349        23,921,718
                                                                   ===========       ===========       ===========       ===========
</TABLE>

                                       28
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

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

                                         1999            1998            1997
                                      ----------      ----------      ----------

Proceeds .......................      $6,739,179      18,838,215       4,434,596
Gross realized gains ...........         166,347         330,031          87,499
Gross realized losses ..........         714,014          21,990           6,096
                                      ==========      ==========      ==========

        During 1999 and 1998, the Company  recognized  write downs of $1,491,000
        and  $475,000,  respectively,  on  interest  only strip  mortgage-backed
        securities  resulting from a decline in fair value that was judged to be
        other than temporary.

        The Company has investments in certain  securities  which are classified
        as high risk and are found  within the caption  Interest  Only  Stripped
        Mortgage-backed Securities and Collateralized Mortgage Obligations.

        At June 30,  1999,  certain  securities  available-for-sale  with a fair
        value of approximately  $8,349,000 were pledged as collateral for public
        funds deposits.

                                       29
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

  (3)   Loans Receivable

        At June 30, 1999 and 1998, loans receivable consisted of the following:
<TABLE>
<CAPTION>
                                                        1999             1998
                                                    -----------      -----------
<S>                                                 <C>              <C>
Residential real estate loans:
   One-to-four-family ........................      $34,428,507       33,728,158
   One-to four-family held for sale ..........          969,243          538,300
   Multifamily ...............................        1,338,804        1,112,894
   Construction ..............................          151,809        1,999,818
                                                    -----------      -----------

                                                     36,888,363       37,379,170

Commercial real estate loans .................        5,427,615        4,471,829
                                                    -----------      -----------

             Total real estate ...............       42,315,978       41,850,999
                                                    -----------      -----------

Consumer loans:
   Automobile ................................        3,990,454        3,840,944
   Home improvement ..........................        1,047,558        3,150,311
   Deposit accounts ..........................          148,990          178,883
   Other .....................................        2,098,553        2,319,831
                                                    -----------      -----------

             Total consumer ..................        7,285,555        9,489,969
                                                    -----------      -----------

Commercial business loans ....................        6,871,944        5,682,429
                                                    -----------      -----------

                                                     56,473,477       57,023,397

Less:
   Loans in process ..........................             --            597,825
   Deferred fees and discounts ...............           64,088           80,681
   Allowance for losses on loans .............          342,990          348,473
                                                    -----------      -----------

                                                    $56,066,399       55,996,418
                                                    ===========      ===========
</TABLE>


        At June 30, 1999,  the Bank had  committed to  originate  $1,440,460  of
        fixed and variable rate loans. In addition,  the Bank had customers with
        unused lines of credit totaling $1,510,000 at June 30, 1999.

        At June 30, 1999 and 1998, the Bank had  nonaccrual  loans of $1,161,000
        and $922,000, respectively. The allowance for losses on loans related to
        these   impaired   loans  was   approximately   $97,000   and   $90,000,
        respectively.  The  average  balances  of such loans for the years ended
        June 30, 1999, 1998, and 1997, were $1,192,000,  $745,000, and $523,000,
        respectively.  For the  years  ended  June 30,  1999,  1998,  and  1997,
        interest  income which would have been recorded under the original terms
        of  such  loans  was  approximately  $133,853,   $96,000,  and  $57,000,
        respectively,   and  interest  income  actually   recorded  amounted  to
        approximately $72,000, $48,000, and $37,000, respectively.

                                       30
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        Loan  customers  of the Bank  include  certain  executive  officers  and
        directors and their related interests and associates.  All loans to this
        group were made in the ordinary  course of business at prevailing  terms
        and conditions.  Changes in loans outstanding to executive  officers and
        directors for the years ended June 30, 1999 and 1998 were as follows:

                                                       1999             1998
                                                    ---------         ---------

Balance at beginning of year ...............        $ 285,074           192,106
Advances ...................................             --             111,000
Repayments .................................         (211,176)          (18,032)
                                                    ---------         ---------

Balance at end of year .....................        $  73,898           285,074
                                                    =========         =========

(4)     Allowance for Losses on Loans

        Following  is a summary  of the  allowance  for  losses on loans for the
        three years ending June 30, 1999:

                                           1999           1998           1997
                                        ---------      ---------      ---------

Balance at beginning of year ......     $ 348,474        348,028        317,645
Provision for losses ..............       138,540         94,000        252,111
Charge-offs .......................      (168,549)       (96,388)      (226,701)
Recoveries ........................        24,525          2,834          4,973
                                        ---------      ---------      ---------

Balance at end of year ............     $ 342,990        348,474        348,028
                                        =========      =========      =========

(5)     Real Estate

        Following is a summary of real estate as of June 30, 1999 and 1998:

                                                           1999           1998
                                                         --------       --------

Real estate acquired through foreclosure .........       $   --             --
Real estate acquired for investment ..............        270,779        190,402
                                                         --------       --------

                                                         $270,779        190,402
                                                         ========       ========

        There were no  allowances  for losses on real estate for the years ended
        June 30, 1999, 1998, and 1997, respectively.

                                       31
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

  (6)   Office Property and Equipment

        At June 30,  1999 and 1998,  the cost and  accumulated  depreciation  of
        office property and equipment were as follows:

                                                         1999           1998
                                                     ----------       ----------

Land .........................................       $  216,595          216,595
Office buildings .............................        1,092,164        1,106,698
Furniture, fixtures and equipment ............        1,154,698        1,098,418
Automobile ...................................           18,883           20,363
                                                     ----------       ----------

                                                      2,482,340        2,442,074

Less accumulated depreciation ................        1,393,287        1,315,558
                                                     ----------       ----------

                                                     $1,089,053        1,126,516
                                                     ==========       ==========

(7)     Accrued Interest Receivable

        At June 30, 1999 and 1998, accrued interest receivable  consisted of the
        following:

                                                         1999             1998
                                                       --------         --------

Loans receivable .............................         $433,651          498,063
Securities available-for-sale ................           88,470          185,057
                                                       --------         --------

                                                       $522,121          683,120
                                                       ========         ========

(8)     Deposits

        Deposit  account  balances at June 30, 1999 and 1998 are  summarized  as
        follows:

                                                       1999               1998
                                                  -----------        -----------

Balance by account type:
   Savings ...............................        $23,442,674         18,275,661
   Money market ..........................            462,859            598,734
   Demand and NOW ........................          7,366,239          6,453,159
   Certificates of deposit ...............         28,304,460         34,817,312
                                                  -----------        -----------

                                                  $59,576,232         60,144,866
                                                  ===========        ===========

        The  aggregate   amount  of  certificates  of  deposit  with  a  minimum
        denomination of $100,000 was approximately  $2,188,000 and $5,994,000 at
        June 30, 1999 and 1998, respectively.

                                       32
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        At June 30, 1999,  scheduled  maturities of certificates of deposit were
        as follows:

                             2000                $18,349,723
                             2001                  6,799,876
                             2002                  2,080,352
                             2003                    570,277
                      2004 and thereafter            504,232
                                                 -----------

                                                 $28,304,460
                                                 ===========

        Interest expense on deposits is summarized as follows:


                                                 Years ended June 30,
                                      ------------------------------------------
                                         1999            1998             1997
                                      ----------      ----------      ----------

Savings ........................      $  950,097         742,894         701,023
Money market ...................          12,745          17,843          22,275
Demand and NOW .................         131,810         104,480          93,254
Certificates of deposit ........       1,542,291       1,898,633       1,865,783
                                      ----------      ----------      ----------

                                      $2,636,943       2,763,850       2,682,335
                                      ==========      ==========      ==========

        At June 30, 1999 and 1998,  accrued interest payable on deposits totaled
        $248,686 and $355,860, respectively.

  (9)   Advances from FHLB

        Advances from FHLB at June 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
                                                     1999                                1998
                                       ----------------------------------   -------------------------------
                                                          Weighted-                           Weighted-
                                                           average                             average
                                          Amount            rates              Amount           rates
                                       --------------   --------------      --------------  ---------------
<S>                                  <C>                     <C>             <C>                <C>
Advance maturity:
   Within one year:
      Variable                       $        --              --             $ 6,000,000        various
      Fixed                              870,712             5.50%               937,912          5.90%
   Beyond one year, but within
      five years - Fixed               1,100,263             4.93                100,262          5.80
   Beyond five years, but within
      ten years - Fixed               14,200,000             5.02             13,000,000          5.03
   Beyond ten years, but within
      fifteen years - Fixed              435,201             5.50                     --            --
                                     ------------                            ------------

                                     $16,606,176                             $20,038,174
                                     ============                            ============
</TABLE>
                                       33
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        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. Variable rate advances are based on LIBOR.

 (10)   Taxes on Income

        Taxes on income for the years ended June 30, 1999,  1998, and 1997, were
        as follows:
<TABLE>
<CAPTION>
                           1999                               1998                             1997
             ----------------------------------  -------------------------------  -------------------------------
              Federal     State       Total      Federal     State      Total     Federal     State      Total
             ----------  ---------  -----------  ---------  --------- ----------  ---------  --------- ----------
<S>          <C>         <C>        <C>          <C>         <C>       <C>        <C>         <C>       <C>
Current      $(437,600)   (92,000)    (529,600)   229,700     65,000    294,700    121,300     24,000    145,300
Deferred        49,000     14,000       63,000     19,000      3,000     22,000         --         --         --
             ----------  ---------  -----------  ---------  --------- ----------  ---------  --------- ----------

             $(388,600)   (78,000)    (466,600)   248,700     68,000    316,700    121,300     24,000    145,300
             ==========  =========  ===========  =========  ========= ==========  =========  ========= ==========
</TABLE>

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

                                                    Years ended June 30,
                                               ------------------------------
                                                 1999       1998       1997
                                               --------   --------   --------
Federal income tax rate ....................     (34.0%)      34.0       34.0
Items affecting federal income tax rate:
   State tax, net of federal benefit .......       (4.2)       4.9        3.7
   Low income housing tax credits ..........       (3.4)      (4.6)      (9.9)
   Other, net ..............................        3.9        0.7        6.5
                                               --------   --------   --------

                                                 (37.7%)      35.0       34.3
                                               ========   ========   ========


                                       34
<PAGE>
        The tax effects of temporary  differences  that give rise to significant
        portions of the deferred tax assets and deferred tax liabilities at June
        30, 1999 and 1998 are presented below:

                                                             1999         1998
                                                           --------     --------

Deferred tax assets:
   Accrued expenses not deducted .....................     $ 30,000       37,000
   Unrealized losses on securities
      available-for-sale .............................      274,000      489,000
   State net operating loss ..........................       13,000        6,000
   Loan loss allowance ...............................       66,000        1,000
   Other, net ........................................         --          9,000
                                                           --------     --------

             Total gross deferred tax assets .........      383,000      542,000
                                                           --------     --------

Deferred tax liabilities:
   FHLB stock dividends ..............................       57,000       57,000
   Accrued interest receivable not taxed .............        3,000        8,000
   Deferred loan fees ................................       69,000       71,000
   Loan loss allowance ...............................         --           --
                                                           --------     --------

             Total gross deferred tax liabilities ....      129,000      136,000
                                                           --------     --------

             Net deferred tax assets .................     $254,000      406,000
                                                           ========     ========

        There was no valuation  allowance  for  deferred  tax assets  during the
        years ended June 30, 1999, 1998, and 1997.

        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.

 (11)   Employee Benefits

        Pension Plan

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

                                       35
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        The  following  table sets forth the plan's  funded  status and  amounts
        recognized in the consolidated financial statements at June 30, 1999 and
        1998:

                                                         1999           1998
                                                     -----------    -----------

Change in Benefit Obligaiton:
   Benefit Obligation at Beginning of Year .......   $ 1,044,684        981,480
   Service Cost ..................................        67,394         61,554
   Interest Cost .................................        65,293         59,256
   Actuarial (Gain)/Loss .........................       211,129        (22,287)
   Benefits Paid .................................          --          (35,319)
                                                     -----------    -----------

   Benefit Obligation at End of Year .............   $ 1,388,500      1,044,684
                                                     ===========    ===========

Change in Plan Assets:
   Fair Value of Plan Assets at Beginning of Year    $ 1,048,560        829,431
   Actual Return on Plan Assets ..................        49,309        179,902
   Employer Contributions ........................        91,409         74,546
   Benefits Paid .................................          --          (35,319)
                                                     -----------    -----------

   Fair Value of Plan Assets and End of Year .....   $ 1,189,278      1,048,560
                                                     ===========    ===========

Reconciliation of Funded Status:
   Funded Status (Underfunded)/Overfunded ........   $  (199,222)         3,876
   Unrecognized Net Actuarial (Gain)/Loss ........       161,153        (84,836)
   Unrecognized Transition (Asset)/Obligation ....       (14,825)       (16,586)
                                                     -----------    -----------

   Accrued Benefit Cost ..........................   $   (52,894)       (97,546)
                                                     ===========    ===========

                                       36
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        The Net Periodic  Benefit Cost for the years ending June 30, 1999, 1998,
        and 1997 includes the following components:
<TABLE>
<CAPTION>
                                                          Years ended June 30,
                                                   --------------------------------
                                                     1999        1998         1997
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
Components of Net Periodic Benefit Cost:
   Service Cost ................................   $ 67,394      61,554      55,038
   Interest Cost ...............................     65,293      59,256      54,529
   Expected Return on Plan Assets ..............    (84,169)    (63,749)    (50,232)
   Amortization of Transition (Asset)/Obligation     (1,761)     (1,761)     (1,761)
                                                   --------    --------    --------

             Net Periodic Benefit Cost .........   $ 46,757      55,300      57,574
                                                   ========    ========    ========
</TABLE>

                                                       1999              1998
                                                       ----              ----

Discount Rate                                         5.75%             6.25%

Expected Long Term Rate of Return                     8.25%             7.75%

Weighted Average Rate of Compensation Increase        5.09%             5.13%

Amortization Method                              Straight-Line     Straight-Line

        ESOP Plan

        All  employees  meeting age and  service  requirements  are  eligible to
        participate in an ESOP established in June 1994.  Contributions  made by
        the Bank to the ESOP are allocated to participants by a formula based on
        compensation.  Participant  benefits become 100% vested after five years
        of service.  The ESOP purchased  80,962 shares (restated for two-for-one
        stock  dividend) in the Bank's  conversion  and is  accounted  for under
        Employers'  Accounting for Employee Stock Ownership Plans (SOP 93-6). At
        June 30, 1999 and 1998,  66,168 and 56,197  shares,  respectively,  were
        committed  to be  released,  and the fair value of the 11,498 and 23,251
        unearned shares was approximately $96,000 and $360,000. ESOP expense was
        $153,154,  $163,843,  and  $108,973  for the years ended June 30,  1999,
        1998, and 1997, respectively.

        Employment Agreements

        The Company has entered into employment agreements, which expire in July
        2000, with two of its executive officers.  The agreements provide, among
        other things, for payment to the officers of up to 299% of the officers'
        then  current  annual  compensation  in the  event  there is a change of
        control of the Company  where  employment  terminates  involuntarily  in
        connection with such change of control.

        Stock Options

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

                                       37
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        Changes in options  outstanding  and  exercisable  during 1999 and 1998,
        were as follows:

                         Exercisable        Outstanding        Option price
                           options            options           per share
                       -----------------  -----------------  -----------------

June 30, 1997 ....               44,425             74,042   $ 5.50 - 6.06

Vested ...........               14,809                 --     5.50 - 6.06
Exercised ........              (28,862)           (28,862)    5.50 - 6.06
                       -----------------  -----------------  -----------------

June 30, 1998 ....               30,372             45,180     5.50 - 6.06

Vested ...........               14,808                 --      5.50-6.06
Exercised ........                 (120)              (120)        5.50
                       -----------------  -----------------  -----------------

June 30, 1999 ....               45,060             45,060   $  5.50-6.06
                       =================  =================  =================

        Recognition and Retention Plan

        In 1995, the Company  established a recognition and retention plan (RRP)
        for certain executive officers and directors. The Company authorized the
        RRP to award  shares equal to  approximately  4% of the shares of common
        stock of the Company. The employees become vested in the shares of stock
        over a five-year period.  RRP expense for the years ended June 30, 1999,
        1998, and 1997, was $11,439, $36,216, and $36,216, respectively.

 (12)   Stockholders' Equity

        Stock Conversion

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

        Regulatory Capital Requirements

        The Financial  Institution Reform,  Recovery and Enforcement Act of 1989
        (FIRREA) and the capital  regulations of the 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.

                                       38
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

        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 the regulatory  capital  requirements  at June 30, 1999 and
        1998.

        The Bank met all regulatory  capital  requirements  at June 30, 1999 and
        1998.

        The Bank's actual and required capital amounts and ratios as of June 30,
        1999 were as follows:
<TABLE>
<CAPTION>
                                                                                                To be well
                                                                      For capital           capitalized under
                                                                       adequacy             prompt corrective
                                               Actual                  purposes             action provisions
                                         --------------------     --------------------     ---------------------
                                           Amount     Ratio         Amount     Ratio         Amount      Ratio
                                         -----------  -------     -----------  -------     ------------ --------
<S>                                     <C>            <C>       <C>             <C>       <C>            <C>
Tangible capital (to tangible assets)   $ 5,773,000     6.9%     $  1,664,000    2.0%      $       --      0.0%
Leverage/equity (core) capital
   (to adjusted tangible assets)          5,773,000     7.0         3,329,000    4.0        4,161,000      5.0
Tier I risk-based capital
   (to risk-weighted assets)              5,773,000    11.9         1,934,000    4.0        2,901,000      6.0
Risk-based (total) capital
   (to risk-weighted assets)              6,089,000    12.6         3,868,000    8.0        4,835,000     10.0
                                         ===========  =====       ===========  =======     ============ ========
</TABLE>
        At June 30,  1999 and 1998,  the Bank had  federal  income  tax bad debt
        reserves of approximately $1,263,000 which constitute allocations to bad
        debt reserves for federal income tax purposes for which no provision for
        taxes on income had been made. If such allocations are charged for other
        than bad debt  losses,  taxable  income is  created to the extent of the
        charges.  The Bank's  retained  earnings  at June 30, 1999 and 1998 were
        substantially  restricted  because of the effect of these income tax bad
        debt reserves.
<PAGE>

        Dividend Restrictions

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

                                       39
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

 (13)   Special Deposit Insurance Assessment

        On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Act)
        was signed into law. The Act imposed a one-time  special  assessment  of
        65.7 basis points on deposits  held as of March 31, 1995,  to capitalize
        the Savings  Association  Insurance Fund (SAIF).  All of the deposits of
        the Bank are SAIF insured.  The special  assessment of $330,875 was paid
        by the Bank on November 27, 1996.  Subsequent to the special assessment,
        the premium for  SAIF-insured  deposits was reduced from 23 basis points
        to 6.4 basis points,  thus reducing  deposit  insurance  expense for the
        Bank.

 (14)   Fair Value of Financial Instruments

        The estimated fair values of the Company's  financial  instruments as of
        June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
                                                    June 30, 1999                     June 30, 1998
                                            -------------------------------  --------------------------------
                                              Recorded           Fair           Recorded           Fair
                                               amount           value            amount           value
                                            --------------  ---------------  ---------------  ---------------
<S>                                         <C>             <C>              <C>              <C>
Financial assets:
   Cash and cash equivalents                $   7,917,020        7,917,020        6,366,619        6,366,619
   Securities available-for-sale               17,096,985       17,096,985       23,921,718       23,921,718
   Loans                                       56,066,399       56,361,401       55,996,418       56,560,330
   FHLB stock                                   1,202,500        1,202,500        1,202,500        1,202,500
   Accrued interest receivable                    522,121          522,121          683,120          683,120
Financial liabilities:
   Deposits                                    59,576,232       59,673,754       60,144,866       60,486,010
   FHLB advances                               16,606,176       15,350,823       20,038,174       20,142,145
   Advance payments by borrowers
      for taxes and insurance                     399,830          399,830          407,050          407,050
   Accrued interest payable                       380,617          380,617          355,860          355,860
                                            ==============  ===============  ===============  ===============
<CAPTION>
                                                              Unrealized                        Unrealized
                                              Notional          gains           Notional          gains
                                                value          (losses)          value           (losses)
                                            --------------  ---------------  ---------------  ---------------
<S>                                         <C>             <C>              <C>              <C>
Off balance sheet assets:
   Commitments to extend credit             $   1,440,460               --          690,000               --
   Unused lines of credit                       1,510,000               --          870,000               --
                                            ==============  ===============  ===============  ===============
</TABLE>

(15)    Contingency

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

                                       40
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

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

        The Parent  Company's  principal asset is its 100% ownership of the Bank
        and the Bank's  subsidiary.  The following  are the condensed  financial
        statements for the Parent Company:
<TABLE>
<CAPTION>
                          Condensed Balance Sheets

                                                       1999             1998
                                                   -----------      -----------
<S>                                                <C>              <C>
Cash and cash equivalents ....................     $   409,472          375,000
Securities available-for-sale ................         745,803        1,395,421
Loans receivable, net ........................       1,052,717          439,207
Loans receivable from subsidiary .............          65,503          129,205
Investment in subsidiary .....................       5,417,889        5,765,898
Real estate ..................................         270,779          190,402
Interest receivable ..........................          19,623           18,185
Deferred taxes ...............................          64,100           21,375
Income tax receivable ........................          14,461          154,000
                                                   -----------      -----------

             Total assets ....................     $ 8,060,347        8,488,693
                                                   ===========      ===========

Accrued expenses and other liabilities .......     $      --                873
Common stock .................................          10,462           10,462
Additional paid-in capital ...................       4,996,761        4,894,744
Retained earnings ............................       4,804,455        5,730,257
Treasury stock, at cost ......................      (1,229,571)      (1,185,924)
Unearned ESOP shares .........................         (65,503)        (129,205)
Unearned RRP shares ..........................            --            (11,439)
Accumulated other comprehensive
   income - net unrealized loss
   on securities available for sale ..........        (456,257)        (821,075)
                                                   -----------      -----------

             Total liabilities and equity ....     $ 8,060,347        8,488,693
                                                   ===========      ===========
</TABLE>

<TABLE>
<CAPTION>
                           Condensed Statements of Operations

                                                 1999         1998         1997
                                              ---------    ---------    ---------

<S>                                           <C>          <C>          <C>
Interest income ...........................   $  79,472      123,091      177,996
Equity in (losses) earnings of subsidiaries    (634,347)     814,876      230,579
Other income (expense) ....................    (131,105)    (334,958)      27,053
Other expenses ............................    (180,091)    (187,314)    (150,136)
                                              ---------    ---------    ---------

             Net earnings before tax ......    (866,071)     415,695      285,492

Income tax (benefit) expense ..............     (94,300)    (173,689)       7,000
                                              ---------    ---------    ---------

             Net (loss) earnings ..........   $(771,771)     589,384      278,492
                                              =========    =========    =========
</TABLE>
                                       41
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                    Condensed Statements of Cash Flows

                                                              1999           1998           1997
                                                          -----------    -----------    -----------
<S>                                                       <C>            <C>            <C>
Operating activities:
   Net (loss) earnings ................................   $  (771,771)       589,384        278,492
   Equity in losses (earnings) of subsidiary ..........       634,347       (814,876)      (230,579)
   Other, net .........................................       370,614        288,588         29,809
                                                          -----------    -----------    -----------

             Net cash provided by operating activities        233,190         63,096         77,722
                                                          -----------    -----------    -----------

Investing activities:
   Proceeds from sale of securities available-for-sale      1,844,763      2,647,147        272,962
   Purchase of securities available-for-sale ..........    (1,510,444)    (3,445,162)      (577,106)
   Principal collected on securities available-for-sale        88,340        599,306           --
   Purchase of real estate ............................      (100,000)          --             --
   Proceeds from the sale of real estate ..............          --             --           65,233
   Loans receivable, net ..............................      (549,808)      (282,449)        60,505
                                                          -----------    -----------    -----------

              Net cash used in investing activities ...      (227,149)      (481,158)      (178,406)
                                                          -----------    -----------    -----------

Financing activities:
   Dividends from subsidiary ..........................       226,109        588,767        750,000
   Treasury stock acquired ............................       (44,375)          --         (337,354)
   Exercise of stock options ..........................           660        159,585           --
   Dividends paid .....................................      (153,963)      (144,982)      (130,032)
                                                          -----------    -----------    -----------

             Net cash provided by
               financing activities ...................        28,431        603,370        282,614
                                                          -----------    -----------    -----------

             Net increase in cash and
               cash equivalents .......................        34,472        185,308        181,930

Cash and cash equivalents at beginning of year ........       375,000        189,692          7,762
                                                          -----------    -----------    -----------

Cash and cash equivalents at end of year ..............   $   409,472        375,000        189,692
                                                          ===========    ===========    ===========
</TABLE>
                                       42
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 1999 and 1998

(17)     Subsequent Event

        On August 23, 1999,  the Bank entered into a supervisory  agreement with
        the Office of Thrift Supervision (OTS) which requires certain actions by
        the Bank including

        o Implementing   procedures  to  improve   credit   administration   and
          documentation;

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

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

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



                                       43
<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, 1999, at the main office of Horizon  Federal Savings Bank, 301 First
Avenue East, Oskaloosa, Iowa.


STOCK LISTING

Horizon  Financial  Services  Corporation  common  stock is traded on the Nasdaq
SmallCap Market 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
Stock Market.  Such information  reflects  inter-dealer  prices,  without retail
mark-up, mark-down or commission and may not represent actual transactions.


                                           FISCAL 1999
                             -------------------------------------
                               HIGH         LOW          DIVIDENDS

First Quarter                $16.750      $14.875          $.045
Second Quarter                15.750       12.500           .045
Third Quarter                 12.750       10.000           .045
Fourth Quarter                10.250        7.000           .045


                                           FISCAL 1998 (1)
                             -------------------------------------
                               HIGH         LOW          DIVIDENDS

First Quarter               $10.000      $  9.250         $ .040
Second Quarter               14.500        10.375           .045
Third Quarter                16.750        12.125           .045
Fourth Quarter               16.875        15.500           .045

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

(1)  Restated  to reflect  the  2-for-1  stock  split paid in the form of a 100%
     stock dividend by the Company on November 10, 1997.


Cash dividend  payout is  continually  reviewed by  management  and the Board of
Directors.  The  Company  intends to  continue  its  policy of paying  quarterly
dividends;  however, the payment will depend upon a number of factors, including
capital requirements, regulatory limitations, the Company's financial condition,
results of  operations  and the Bank's  ability to pay dividends to the Company.
The Company relies  significantly upon such dividends  originating from the Bank
to accumulate  earnings for payment of cash dividends to its  stockholders.  See
Notes  12  and  17 to the  Notes  to  Consolidated  Financial  Statements  for a
discussion of restrictions on the Bank's ability to pay dividends.

At September 15, 1999, there were 875,062 shares of Horizon  Financial  Services
Corporation   common  stock  issued  and  outstanding  and   approximately   160
stockholders of record.

STOCKHOLDERS AND GENERAL INQUIRIES             TRANSFER AGENT

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


                                       44
<PAGE>
                     HORIZON FINANCIAL SERVICES CORPORATION
                              CORPORATE INFORMATION
--------------------------------------------------------------------------------

COMPANY AND BANK ADDRESS

  301 First Avenue East             Telephone:(515) 673-8328
  Oskaloosa, IA  52577              Fax:    (515) 673-0074



DIRECTORS OF THE BOARD

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

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

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


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


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


HORIZON FINANCIAL SERVICES CORPORATION EXECUTIVE OFFICERS

Robert W. DeCook
  President and Chief Executive Officer

Thomas L. Gillespie
  Vice President

Sharon K. McCrea
  Treasurer and Chief Financial Officer


INDEPENDENT AUDITORS

KPMG LLP
2500 Ruan Center
Des Moines, Iowa  50309

CORPORATE COUNSEL

McCoy, Faulkner & Broerman
216 South First Street
Oskaloosa, Iowa  52577

SPECIAL COUNSEL

Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Seventh Floor
Washington, D.C.  20005