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2000 ANNUAL REPORT

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                           HORIZON FINANCIAL SERVICES
                                   CORPORATION



<PAGE>



TABLE OF CONTENTS



         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..................................16
         Stockholder Information............................................40
         Corporate Information..............................................41





                          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,  2000,  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 22, 2000



Dear Stockholder:

I am  pleased  to report to you that the  Company's  fiscal  year ended June 30,
2000, was again one of  profitability.  Net earnings for the year were $486,000,
representing  a return on  average  assets of .58%.  Net  interest  income,  the
Company's core earnings,  for fiscal 2000, was $2.7 million. Net interest income
after provision for losses on loans in fiscal 2000 was $2.6 million, an increase
of $216,000 or 8.9% from fiscal 1999.

Total assets  decreased by $1.9 million,  a decrease of 2.3%.  Loans  receivable
increased by $6.35 million as residential real estate and commercial real estate
loans  increased.  The Company's  average  interest rate spread,  the difference
between  the yield  earned on  interest  earning  assets  and the rates  paid on
interest bearing liabilities, was 3.06%, and its net interest margin was 3.40%.

The Company  repurchased  1.4% of its common  stock,  or 12,100  shares,  during
fiscal 2000 and is currently engaged in the repurchase of an additional 4.9%, or
42,198  shares.  To date,  the Company has  repurchased  17,600 shares under its
current repurchase program.  The shares repurchased during fiscal 2000 were made
at an  average  price  of  $6.99,  or 73.0%  of book  value  at June  30,  2000.
Management believes this to be an excellent  investment and a prudent use of the
Company's excess capital.

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

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

Yours very truly,


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

<PAGE>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                                             At June 30,
                                                 ----------------------------------------------------------------------

                                                       2000          1999         1998         1997           1996
                                                 ----------------------------------------------------------------------
                                                                           (In Thousands)
Selected Financial Condition Data:
---------------------------------
<S>                                                    <C>           <C>         <C>          <C>            <C>
Total assets.....................................      $83,184       $85,023     $89,947      $85,969        $73,464
Cash and cash equivalents........................        1,981         7,917       6,367        5,621          3,471
Securities available-for-sale....................       15,670        17,097      23,922       24,942         18,049
Loans receivable, net............................       62,417        56,066      55,996       52,193         49,104
Deposits.........................................       64,761        59,576      60,145       57,641         54,759
Advances from FHLB...............................        9,014        16,606      20,038       19,102          9,661
Stockholders' equity.............................        8,266         8,060       8,488        8,412          8,390
</TABLE>


<TABLE>
<CAPTION>

                                                                          Year Ended June 30,
                                                   --------------------------------------------------------------------

                                                         2000          1999         1998(1)      1997(1)     1996(1)
                                                   --------------------------------------------------------------------

                                                                 (In Thousands, Except Per Share Data)
Selected Operations Data:
------------------------
<S>                                                       <C>           <C>           <C>        <C>          <C>
Total interest income..............................       $6,171        $6,192        $6,744     $5,895       $5,454
Total interest expense.............................        3,448         3,642         4,021      3,402        3,144
                                                         -------       -------        ------     ------       ------
  Net interest income..............................        2,723         2,550         2,723      2,493        2,310
Provision for losses on loans......................           96           139            94        252          328
                                                       ---------      --------      --------    -------      -------
Net interest income after
 provision for losses on loans.....................        2,627         2,411         2,629      2,241        1,982
Noninterest income
  Fees, commissions and service charges............          470           497           448        338          345
  Gain (loss) on sale of securities, net...........         (234)       (2,038)         (167)        81           39
  Other noninterest income.........................          ---             8            27         19           94
                                                      ----------     ---------       -------    -------      -------
Total noninterest income...........................          236        (1,533)          308        438          478
Total noninterest expense..........................        2,138         2,116         2,031      2,255(2)     1,886
                                                        --------        ------        ------    -------      -------
Earnings (loss) before taxes on income.............          725        (1,238)          906        424          573
Taxes on income (benefits).........................          239          (466)          317        146          197
                                                        --------        -------      -------     ------       ------
Net earnings (loss)................................         $486         $(772)         $589       $278         $376
                                                            ====         ======         ====       ====         ====

Basic earnings (loss) per common share.............        $0.56       ($0.90)        $ 0.71     $ 0.34       $ 0.43
Diluted earnings (loss) per common share...........        $0.56       ($0.90)        $ 0.69     $ 0.33       $ 0.42
Dividends per share................................        $0.18        $0.18         $ 0.18     $ 0.16       $ 0.16
</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,
                                                           -------------------------------------------------------------------------
                                                                    2000        1999       1998       1997        1996
                                                           -------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
<S>                                                                <C>         <C>        <C>        <C>         <C>
Performance Ratios:
  Return on assets (ratio of net earnings to average
     total assets).........................................           .58%       (.88%)      .67%       .35(1)      .53%
  Interest rate spread information:
   Average during year.....................................          3.06        3.00       2.96       3.12        3.09
   End of year.............................................          2.86        3.03       3.05       3.07        3.06
  Net interest margin(2)...................................          3.40        3.17       3.23       3.41        3.44
  Ratio of operating expense to average total
    assets.................................................          2.54        2.42       2.31       2.83(1)     2.64
  Return on stockholders' equity (ratio of net
    earnings to average equity)............................          5.95       (9.33)      6.97       3.31(1)     4.38
 Efficiency ratio(3).......................................         66.96       69.26      63.51      67.51       68.61

Asset Quality Ratios:
 Non-performing assets to total assets at end of
   year(4).................................................          1.39        1.36       1.02       1.22        1.27
 Allowance for losses on loans to non-performing
    loans(4)...............................................         34.49       29.57      37.74      50.51       34.01
 Allowance for losses on loans  to total loans.............           .61         .61        .61        .65         .63

Other Ratios:
 Stockholders' equity to total assets at end of
   year....................................................          9.95        9.48       9.44       9.78       11.42
 Average stockholders' equity to average assets............          9.71        9.46       9.61      10.54       12.00
 Average interest-earning assets to average
    interest-bearing liabilities...........................        107.83%     103.79%    105.65%    106.13%     107.31%

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 stockholders'  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 noninterest 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, gain or loss on securities available-for-sale,  the
establishment of provisions for losses on loans,  income derived from subsidiary
activities,  the level of operating  expenses and income  taxes.  The  Company's
operating expenses  principally  consist of employee  compensation and benefits,
occupancy expenses, federal deposit insurance premiums, data processing expenses
and other general and administrative expenses.

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

         Local economic  conditions in the Bank's market are stable. As a result
of an  over-supply  of  grain,  farm  prices  for  grain,  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, 2000 Compared to June 30, 1999.  Total assets  decreased  $1.9
million,  or 2.3%,  to $83.1 million at June 30, 2000 from $85.0 million at June
30, 1999.  The decrease was  reflected  primarily in a $5.9 million  decrease in
cash and cash equivalents,  a $1.4 million decrease in securities  available for
sale, a $500,000  decrease in income tax receivable  and a $500,000  decrease in
Federal  Home Loan Bank stock.  This  decrease  was  partially  offset by a $6.3
million increase in loans receivable. The decrease was used primarily to pay off
advances from the Federal Home Loan Bank (the "FHLB") of Des Moines.

         Total liabilities  decreased $2.1 million, or 2.8%, to $74.9 million at
June 30, 2000 from $77.0  million at June 30,  1999,  primarily as a result of a
$7.6 million  decrease in FHLB advances.  The decrease was partially offset by a
$5.2 million increase in deposits.

         Stockholders' equity increased $200,000,  or 2.55%, during fiscal 2000,
primarily  through  the  retention  of net income and the  amortization  for the
allocated portion of shares held by the ESOP, offset by the payment of dividends
declared on common  stock,  a negative  adjustment of net  unrealized  losses on
securities  available-for-sale and the repurchase of the Company's common stock.
The Company  paid cash  dividends  totaling  approximately  $154,000 or $.18 per
share. The Company repurchased 1.4% of its common stock, 12,100 shares,  under a
stock repurchase program during fiscal 2000. Common stock was repurchased during
2000 at a cost of $84,625, or $6.99 per share.

Results of Operations

Comparison of Fiscal Years Ended June 30, 2000 and June 30, 1999

         General.  Net  earnings  for the year  ended  June 30,  2000  increased
$1,257,000 to $485,000 from a net loss of ($772,000) for the year ended June 30,
1999.  This increase was  primarily  attributable  to a significant  decrease in
losses on sales of securities.

         During fiscal 2000, the Company's return on average assets ("ROAA") and
return  on  average   stockholders'   equity   ("ROAE")   was  .58%  and  5.95%,
respectively,   compared  to  (.88%)  and  (9.33%)  for  fiscal  1999.   Average
stockholders'  equity to  average  assets  was  9.71%  during  fiscal  year 2000
compared to 9.46% during fiscal 1999.  The Company's  dividend  payout ratio was
32% during fiscal 2000.

         Interest  Income.  Interest  income was $6.2 million for the year ended
June 30, 2000 and June 30, 1999. Interest income on loans increased $255,000 and
was  offset  with  a  $267,000   decrease  on  interest   income  on  securities
available-for-sale  for the year ended  June 30,  2000 as  compared  to the year
ended June 30, 1999 reflecting the increase in the average  outstanding  balance
of loans receivable from $55.2 million for the year ended June 30, 1999 compared
to $58.4  million for the year ended June 30, 2000 which was funded  through the
decrease in the average outstanding balance of securities  available-for-sale to
$16.2 million for fiscal 2000 as compared to $21.0 million for fiscal 1999.  The
yield on all average  interest-earning  assets was 7.70% during  fiscal 2000 and
1999.

         Interest Expense.  Interest expense decreased  $195,000 to $3.4 million
for the year ended June 30,  2000  compared  to $3.6  million for the year ended
June 30, 1999. The decrease in interest expense was primarily  attributable to a
decrease in the average outstanding  balance of FHLB advances.  The average rate
paid on advances  increased by 20 basis points to 5.46% during  fiscal 2000 from
5.26% during fiscal 1999.

                                        5

<PAGE>


The average  outstanding balance of savings deposits increased $2.3 million from
$58.4 for the year ended June 30,  1999 to $60.7  million  for fiscal year ended
June 30, 2000. The average rate paid on deposits  decreased by 5 basis points to
4.46% during fiscal 2000 from 4.51% during fiscal 1999. The average rate paid on
all interest-bearing liabilities decreased 6 basis points to 4.64% during fiscal
2000 from 4.70% during fiscal 1999.

         Net Interest  Income.  Net interest income  increased  $173,000 to $2.7
million  in fiscal  2000 from $2.5 in fiscal  1999.  The ratio of the  Company's
average   interest-earning  assets  to  average   interest-bearing   liabilities
increased to 107.83%  during fiscal 2000 from 103.79%  during  fiscal 1999.  The
Company's net interest  margin,  which is net interest income divided by average
interest-earning  assets,  increased 23 basis points to 3.40% for fiscal 2000 as
compared  to 3.17% for  fiscal  1999.  During  this same  period  the  Company's
interest  rate spread  increased  slightly to 3.06% in fiscal 2000 from 3.00% in
fiscal 1999.

         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, 2000, the Company
recorded  a  provision  for losses on loans of  $96,000  compared  to a $139,000
provision  in fiscal  1999.  The  Company  continues  to monitor  and adjust its
allowance for losses on loans as management's analysis of its loan portfolio and
economic  conditions  dictate.  The Company believes it has taken an appropriate
approach to maintain the  allowance for loan losses at a level  consistent  with
the  Company's  loss  experiences  and  considering,  among other  factors,  the
composition  of the  Company's  loan  portfolio,  the  level  of  the  Company's
classified and non-performing assets and their estimated value. Future additions
to the  Company's  allowance  for losses on loans and any change in the  related
ratio of the allowance for losses on loans to non-performing loans are dependent
upon the economy, changes in real estate values and interest rates. In addition,
federal  regulators  may  require  additional  reserves  as a  result  of  their
examination of the Company.  The allowance for losses on loans reflects what the
Company currently believes is an adequate level of reserves,  although there can
be no  assurance  that  future  losses  will not exceed the  estimated  amounts,
thereby  adversely  affecting future results of operations.  As of June 30, 2000
and June 30, 1999 the  Company's  allowance for losses on loans was $379,000 and
$343,000, respectively.

         As of June 30, 2000, 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 $1,155,000 or 1.39% of total assets
compared  to  $1,160,000  or 1.36%  of total  assets  as of June 30,  1999.  The
decrease in  non-performing  assets related  primarily to a $61,000  decrease in
non-  accruing  loans  past-due  90 or  more  days  and a  $56,000  increase  in
repossessed consumer property.

         Noninterest  Income.  Noninterest  income  increased  $1.8  million  to
$236,000 for the year ended June 30, 2000 from  ($1,533,000)  for the year ended
June 30, 1999. The increase was primarily  attributable  to a decrease in losses
on assets  available for sale from a loss of $2.0 million  during fiscal 1999 as
compared  to a loss  of  $234,000  for  fiscal  2000.  The  loss  recognized  on
securities  for fiscal  1999 of $1.5  million was the result of  write-downs  on
interest only mortgage-backed  securities 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, due to refinancings,  of the
underlying mortgage loans as a result of the low interest rate environment.  The
Bank cannot  predict  interest  rates or  prepayment  speeds.  This increase was
slightly offset by a $27,000 decrease in fees,  service charges and commissions,
primarily due to decreased  loan fees received on loans  originated  for sale in
the secondary market as a result of a reduction in loans originated for sale.

         Noninterest Expense. Noninterest expense increased by $22,000 in fiscal
2000.  Increases of $59,000 in other expense and $25,000 in advertising  expense
were partially offset by decreases in  compensation,  payroll taxes and employee
benefits of $45,000 and office property and equipment expense of $16,000.

         Income Tax Expense. Income taxes increased $706,000 to $239,000 for the
year  ended  June 30,  2000 from  ($467,000)  for the same  period in 1999.  The
increase was primarily due to an increase in earnings

                                        6

<PAGE>


prior to taxes on income.  Income tax expense was reduced by low income  housing
credits of approximately $42,000, which will continue annually through 2005. The
Company's effective tax rate for fiscal 2000 was 33.0%.

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 ROAA and 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.

                                        7

<PAGE>


         As of June 30, 1999, 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 $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.

         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.


                                        8

<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,
                                      --------------------------------------------------------------------------------------------

                                        2000                                 1999                             1998
                                      --------------------------------------------------------------------------------------------
                                        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)
Interest-Earning Assets:
<S>                                     <C>         <C>        <C>      <C>         <C>         <C>     <C>        <C>        <C>
 Loans receivable(1).................   $58,401     $4,852     8.31%    $55,243     $4,597      8.32%   $55,015    $4,745     8.63%
 Securities available-for-sale.......    16,259      1,073     6.60      21,020      1,340      6.38     25,394     1,699     6.69
 Other interest-earning assets.......     4,349        176     4.05       3,002        178      5.93      2,786       222     7.97
 FHLB stock..........................     1,087         70     6.44       1,203         77      6.40      1,143        78     6.82
                                       --------   --------             --------    -------             --------   -------
  Total interest-earning assets(1)...    80,096      6,171     7.70      80,468      6,192      7.70     84,338     6,744     8.00
                                       --------     ------              -------     ------              -------     -----

Interest-Bearing Liabilities:
 Savings deposits....................    23,441      1,055     4.50      19,938        857      4.30     17,118       743     4.34
 Money market deposits...............       433         10     2.31         540         13      2.41        747        18     2.41
 Demand and NOW deposits.............     8,063        163     2.02       6,905        132      1.91      5,863       104     1.77
 Certificates of deposit.............    28,822      1,482     5.14      31,031      1,635      5.27     33,989     1,899     5.59
 FHLB Advances.......................    13,522        738     5.46      19,115      1,005      5.26     22,109     1,257     5.69
                                       --------   --------             --------     ------            ---------  --------
   Total interest-bearing liabilities   $74,281      3,448     4.64     $77,529      3,642      4.70   $ 79,826     4,021     5.04
                                        -------   --------              -------     ------             --------   -------

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

Net interest rate spread.............                          3.06%                            3.00%                         2.96%
                                                               ====

Net interest-earning assets..........    $5,815                          $2,939                        $  4,512
                                         ======                          ======                        ========

Net interest margin(2)...............                          3.40%                            3.17%                          3.23%
                                                               ====                            =====                           ====

Average interest-earning assets to

 average interest-bearing liabilities               107.83%                         103.79%                        105.65%
                                                    ======                          ======                         ======
</TABLE>
-------------------------------

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

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


                                        9

<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,
                                        -----------------------------------------------------------------------------
                                                    2000 vs. 1999                         1999 vs. 1998
                                        -----------------------------------------------------------------------------
                                                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......................         $250      $    5     $    255      $     4      $(152)        $(148)
  Securities available-for-sale.........         (404)        137         (267)        (275)       (84)         (359)
  Other interest-earning assets.........           (1)         (1)          (2)         (64)        20           (44)
  FHLB Stock............................           (9)          2           (7)         ---         (1)           (1)
                                             --------     -------    ---------     --------    --------     ---------

    Total interest-earning assets.......        $(164)       $143         $(21)       $(335)     $(217)        $(552)
                                                =====        ====         ----        ======     ======

Interest-bearing liabilities:
  Savings deposits......................           (5)        203          198          142        (28)          114
  Money market deposits.................           (3)        ---           (3)          (5)       ---            (5)
  Demand and NOW deposits...............           19          12           31           36         (8)           28
  Certificates of deposits..............          (92)        (61)        (153)        (184)       (80)         (264)
  FHLB advances.........................         (360)         93         (267)        (212)       (40)         (252)
                                               ------     -------    ---------        ------      -----     ---------

    Total interest-bearing liabilities..        $(441)       $247        $(194)       $(223)     $(156)        $(379)
                                                =====        ====        -----        ======     ======        ------

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

                                       10

<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.


                                                           At June 30,
                                               ---------------------------------
                                                    2000       1999      1998
                                               ---------------------------------
Weighted average yield on:

 Loans receivable, net(1)......................     8.16%      8.14%     8.54%
 Securities available-for-sale.................     6.55       6.37      6.98
 Other interest-earning assets(2)..............     1.85       4.85      5.54
 FHLB stock....................................     6.86       6.25      6.92
   Combined weighted average yield on
   interest-earning assets.....................     7.72       7.52      7.95

Weighted average rate paid on:

 Savings deposits..............................     4.60       4.17      4.42
 Money market deposits.........................     2.41       2.37      2.37
 Demand and NOW deposits.......................     1.98       1.81      1.87
 Certificates of Deposit.......................     5.63       5.12      5.57
 FHLB advances.................................     5.67       5.07      5.24
   Combined weighted average rate paid
   on interest-bearing liabilities.............     4.86       4.49      4.90

 Spread........................................     2.86%      3.03%     3.05%

------------------
(1)   Calculated net of deferred loan fees, loan discounts, loans in process and
      the  allowance  for losses on loans.
(2)   FHLB demand account only other interest-earning assets on June 30, 2000.

Asset/Liability Management

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

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

                                       11

<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,  2000 if the  regulation  applied  to the  Bank.
However,  even if such  deduction  was applied,  the Bank would still meet their
risk-based capital requirement under current regulatory guidelines.

         Presented  below,  as of June 30,  2000,  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.

                                       12

<PAGE>



                     Change in        Board Limit       At June 30,
                   Interest Rate    (min NPV ratios)       2000
                   (Basis Points)       % Change         %Change
                  --------------------------------------------------
                        +300              5.00%            7.73%
                        +200              6.00             8.67
                        +100              6.75             9.47
                           0              6.75            10.06
                        -100              6.75            10.13
                        -200              6.00            10.11
                        -300              5.00            10.63


         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, 2000,  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 5.4%, 11.5% and 10.4% at June
30, 2000, 1999 and 1998, 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 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

                                       13

<PAGE>


maintain  liquidity,  and to meet other  operating  needs. At June 30, 2000, the
Company had $880,000 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, 2000 totaled $20.7 million or 63.7% of the Company's  total  certificates of
deposit. Based on historical experience,  management believes that a significant
portion  of  such  deposits  will  remain  with  the  Company.  There  can be no
assurance,  however,  that the Company can retain all such deposits. At June 30,
2000,  the Company had  outstanding  borrowings of $9.0 million from the FHLB of
Des Moines and had the capacity to borrow up to approximately $19.3 million.

         The primary investing activities of the Company include the origination
of loans and the purchase of mortgage-backed securities. At June 30, 2000, these
assets accounted for over 89.5% of the Company's total assets.  Such origination
and  purchases  are  funded  primarily  from  loan  repayments,   repayments  of
mortgage-backed and investment  securities,  deposit growth, FHLB advances,  and
net income.

         At June 30,  2000,  the  Bank had  tangible  and core  capital  of $6.3
million, or 7.8% of adjusted total assets,  which was approximately $5.1 million
and $3.1 million above the minimum requirements of 1.5% and 4.0%,  respectively.
At June  30,  2000,  the Bank  had  total  risk-based  capital  of $6.7  million
(including $6.3 million in core capital),  or 13.3% of  risk-weighted  assets of
$50.3 million. This amount was $2.6 million above the 8.0% requirement in effect
on that date.

Impact of Inflation and Changing Prices

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

Effect of New Accounting Standards

         Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities" - SFAS 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair  value.  Gains or losses  resulting  from  changes  in the  values of those
derivatives  would be accounted for depending on the use of the  derivative  and
whether  it  qualifies  for  hedge  accounting.  The  key  criterion  for  hedge
accounting  is that  the  hedging  relationship  must  be  highly  effective  in
achieving  offsetting  changes  in fair value or cash  flows.  SFAS 133 does not
allow  hedging  of  a  security   which  is  classified  as  held  to  maturity.
Accordingly,  upon adoption of SFAS 133,  companies may  reclassify any security
from held to maturity to available for sale if they wish to be able to hedge the
security in the future.  SFAS 133, as amended by SFAS 137 and SFAS 138,  will be
effective for the Company beginning July 1, 2000. Management does not expect the
adoption of SFAS 133, SFAS No. 137 and SFAS No. 138 to have a significant impact
on the Company's financial statements.

                                       14

<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, 2000 and 1999 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, 2000. These consolidated  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Horizon Financial
Services  Corporation  and  subsidiaries  as of June  30,  2000 and 1999 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended June 30, 2000, in conformity with accounting  principles
generally accepted in the United States of America.



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

July 24, 2000


                                       15
<PAGE>
<TABLE>
<CAPTION>
                                    HORIZON FINANCIAL SERVICES
                                   CORPORATION AND SUBSIDIARIES

                                   Consolidated Balance Sheets

                                      June 30, 2000 and 1999




                                       Assets                          2000             1999
                                                                   ------------     ------------
<S>                                                                <C>              <C>
Cash and cash equivalents                                          $  1,981,511        7,917,020
Securities available-for-sale (note 2)                               15,670,119       17,096,985
Loans receivable, net (notes 3 and 4)                                62,417,395       56,066,399
Real estate (note 5)                                                    248,951          270,779
Stock in Federal Home Loan Bank, at cost                                702,500        1,202,500
Office property and equipment, net (note 6)                           1,049,821        1,089,053
Accrued interest receivable (note 7)                                    602,765          522,121
Deferred tax asset (note 10)                                            380,300          254,000
Income tax receivable                                                        --          522,699
Prepaid expenses and other assets                                       130,718           81,646
                                                                   ------------     ------------

            Total assets                                           $ 83,184,080       85,023,202
                                                                   ============     ============

                        Liabilities and Stockholders' Equity

Deposits (note 8)                                                  $ 64,761,224       59,576,232
Advances from Federal Home Loan Bank (note 9)                         9,014,199       16,606,176
Advance payments by borrowers for taxes and insurance                   410,555          399,830
Accrued income taxes                                                    201,950               --
Accrued expenses and other liabilities                                  530,145          380,617
                                                                   ------------     ------------

            Total liabilities                                        74,918,073       76,962,855
                                                                   ------------     ------------

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                            10,462           10,462
    Additional paid-in capital                                        5,020,361        4,996,761
    Retained earnings, substantially restricted (note 12)             5,135,636        4,804,455
    Treasury stock, at cost (183,236 and 171,136 shares in 2000
      and 1999, respectively)                                        (1,314,197)      (1,229,571)
    Unearned employee stock ownership plan shares (note 11)              (5,593)         (65,503)
    Accumulated other comprehensive income (loss) - net
       loss unrealized on securities available for sale                (580,662)        (456,257)
                                                                   ------------     ------------

            Total stockholders' equity                                8,266,007        8,060,347

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

            Total liabilities and stockholders' equity             $ 83,184,080       85,023,202
                                                                   ============     ============

</TABLE>

See accompanying notes to consolidated financial statements.

                                               16
<PAGE>
<TABLE>
<CAPTION>
                                            HORIZON FINANCIAL SERVICES
                                           CORPORATION AND SUBSIDIARIES

                                       Consolidated Statements of Operations

                                     Years ended June 30, 2000, 1999, and 1998




                                                                          2000            1999             1998
                                                                      -----------     -----------     -----------
<S>                                                                   <C>               <C>             <C>
Interest income:
   Loans                                                              $ 4,851,413       4,597,470       4,744,988
   Investment securities available-for-sale                             1,072,849       1,339,629       1,699,038
   Other investment income                                                246,441         255,272         300,494
                                                                      -----------     -----------     -----------

           Total interest income                                        6,170,703       6,192,371       6,744,520
                                                                      -----------     -----------     -----------

Interest expense:
   Deposits (note 8)                                                    2,709,550       2,636,943       2,763,850
   Advance from Federal Home Loan Bank                                    738,089       1,005,569       1,257,447
                                                                      -----------     -----------     -----------

           Total interest expense                                       3,447,639       3,642,512       4,021,297
                                                                      -----------     -----------     -----------

           Net interest income                                          2,723,064       2,549,859       2,723,223

Provision for losses on loans (note 4)                                     96,000         138,540          94,000
                                                                      -----------     -----------     -----------

           Net interest income after allowance for losses on loans      2,627,064       2,411,319       2,629,223
                                                                      -----------     -----------     -----------

Noninterest income:
   Fees, service charges and commissions                                  470,009         497,012         447,871
   Loss on sale of securities, net                                       (233,976)     (2,038,667)       (166,959)
   Other                                                                       --           8,573          26,731
                                                                      -----------     -----------     -----------

           Total noninterest income (loss)                                236,033      (1,533,082)        307,643
                                                                      -----------     -----------     -----------

Noninterest expense:
   Compensation, payroll taxes and employee benefits (note 11)          1,165,315       1,210,041       1,237,633
   Advertising                                                             97,440          71,750          66,850
   Office property and equipment                                          317,303         333,336         317,385
   Federal insurance premiums and special assessments (note 13)            41,431          44,197          35,816
   Data processing services                                               169,557         155,169         117,090
   Other real estate expense                                               21,232          35,317          44,777
   Accumulated other comprehensive income (loss) - net                    326,187         266,798         211,231
                                                                      -----------     -----------     -----------
      loss unrealized on securities available for sale
           Total noninterest expense                                    2,138,465       2,116,608       2,030,782
                                                                      -----------     -----------     -----------

           Earnings (loss) before taxes on income (benefit)               724,632      (1,238,371)        906,084

Taxes on income (benefit) (note 10)                                       239,100        (466,600)        316,700
                                                                      -----------     -----------     -----------

           Net earnings (loss)                                        $   485,532        (771,771)        589,384
                                                                      ===========     ===========     ===========

Basic earnings (loss) per common share                                $      0.56           (0.90)           0.71
                                                                      ===========     ===========     ===========

Diluted earnings (loss) per common share                              $      0.56           (0.90)           0.69
                                                                      ===========     ===========     ===========

</TABLE>

See accompanying notes to consolidated financial statements.

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

                     Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income

                                          Years ended June 30, 2000, 1999, and 1998



                                                                                    Additional
                                                        Preferred        Common      paid-in         Retained       Treasury
                                                          stock          stock       capital          earnings         stock
                                                          -----          -----       -------          --------         -----
<S>                                                      <C>             <C>         <C>              <C>          <C>
Balance at June 30, 1997                                 $    --         5,231       4,795,400        5,305,946    (1,360,275)

Comprehensive income:
   Net earnings                                               --            --              --          589,384            --
   Unrealized 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                                         --            --              --               --            --
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)

Comprehensive income:
   Net loss                                                   --            --              --         (771,771)           --
   Unrealized 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)           --

   Accumulated other comprehensive income (loss) - net
Dividloss unrealized$on8securities)available for sale         --            --              --         (153,963)           --
Treasury stock acquired                                       --            --              --               --       (44,375)
Stock options exercised                                       --            --              --              (68)          728
ESOP shares allocated                                         --            --              --               --            --
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)

Comprehensive income:
   Net earnings                                               --            --              --          485,532            --
   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                                --            --              --          485,532            --


Dividends declared ($.18 per share)                           --            --              --         (154,351)           --
Treasury stock acquired                                       --            --              --               --       (84,626)
ESOP shares allocated                                         --            --              --               --            --
Stock appreciation of allocated ESOP shares                   --            --          23,600               --            --


Balance at June 30, 2000                                 $    --         10,462      5,020,361         5,135,636   (1,314,197)

<CAPTION>
                                                                   Recognition    Net unrealized
                                                         Unearned      and          loss on
                                                           ESOP    retention      securities
                                                          shares      plan     available for sale        Total
                                                          ------      ----     ------------------        -----
<S>                                                      <C>       <C>               <C>               <C>
Balance at June 30, 1997                                 (193,798) (47,655)          (92,188)          8,412,661

Comprehensive income:
   Net earnings                                                --       --                --             589,384
   Unrealized 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       --                --             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                                 (129,205) (11,439)         (821,075)         8,487,820

Comprehensive income:
   Net loss                                                   --       --                 --           (771,771)
   Unrealized 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)

   Accumulated other comprehensive income (loss) - net
Dividloss unrealized$on8securities)available for sale         --       --                 --            153,963)
Treasury stock acquired                                       --       --                 --            (44,375)
Stock options exercised                                       --       --                 --                660
ESOP shares allocated                                     63,702       --                 --             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                                 (65,503)      --           (456,257)         8,060,347

Comprehensive income:
   Net earnings                                               --       --                 --            485,532
   Unrealized gains (losses) on securities
    available-for-sale                                        --       --           (331,269)          (331,269)
   Less: reclassification adjustment for net
    realized (gains) losses included in net
    income, net of tax                                        --       --            206,864            206,864


    Total comprehensive income                                --       --           (124,405)           361,127


Dividends declared ($.18 per share)                           --       --                 --           (154,351)
Treasury stock acquired                                       --       --                 --            (84,626)
ESOP shares allocated                                     59,910       --                 --             59,910
Stock appreciation of allocated ESOP shares                   --       --                 --             23,600


Balance at June 30, 2000                                  (5,593)      --           (580,662)         8,266,007

</TABLE>

See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
<TABLE>
<CAPTION>

                                                     HORIZON FINANCIAL SERVICES
                                                    CORPORATION AND SUBSIDIARIES

                                                Consolidated Statements of Cash Flows

                                              Years ended June 30, 2000, 1999, and 1998




                                                                                      2000            1999             1998
                                                                                  -----------    -----------      -----------
<S>                                                                               <C>               <C>               <C>
Cash flows from operating activities:
   Net earnings (loss)                                                            $   485,532       (771,771)         589,384
   Adjustments to reconcile net (loss) income to net cash
     provided by operating activities:
       Depreciation                                                                   140,247        147,461          147,585
       Amortization of fees, premiums, and accretion of discounts, net                (36,793)        (7,636)        (179,225)
       Provision for losses on loans                                                   96,000        138,540           94,000
       Loans originated for sale                                                   (2,558,620)    (9,047,665)      (6,478,320)
       Proceeds on sales of loans                                                   3,527,863      8,616,722        6,076,820
       Amortization of stock compensation plans                                        83,510        177,158          200,059
       Loss (gain) on sale of securities                                              233,976        547,667         (308,041)
       Impairment losses on securities                                                     --      1,491,000          475,000
       Gain on sale of fixed assets                                                        --         (8,573)              --
       Decrease (increase) in accrued interest receivable                             (80,644)       160,999         (128,881)
       (Decrease) increase in accrued taxes payable and deferred taxes                669,877       (877,419)         178,216
       Other, net                                                                     122,283       (209,838)         271,281
                                                                                  -----------    -----------      -----------

          Net cash provided by operating activities                                 2,683,231        356,645          937,878
                                                                                  -----------    -----------      -----------

Cash flows from investing activities:
   Securities available-for-sale:
     Purchases                                                                     (4,215,094)    (6,338,703)     (23,698,089)
     Proceeds from sale                                                             1,232,520      6,739,179       18,838,215
     Proceeds from maturity and principal collected                                 4,081,993      5,047,962        4,780,581
   Reinvested dividends from FHLB stock                                               (65,668)       (75,149)              --
   Loans to customers, net                                                         (7,416,239)       222,422       (3,495,633)
   Proceeds from sale of real estate                                                       --          5,000          360,288
   Purchase of investment real estate                                                      --       (100,000)              --
   Purchase of Federal Home Loan Bank stock                                                --             --         (246,900)
   Proceeds from sale of Federal Home Loan Bank stock                                 500,000             --               --
   Proceeds from sale of office property and equipment                                     --         13,582               --
   Purchase of office property and equipment, net                                    (101,015)      (115,007)        (192,088)
                                                                                  -----------    -----------      -----------

   Accumulated Net cash  (used in) provided  by investing activities
      loss unrealized on securities available for sale                             (5,983,503)     5,399,286       (3,653,626)
                                                                                  -----------    -----------      -----------
 Cash flows from financing activities:
   (Decrease) increase in customer deposit accounts, net                            5,184,992       (568,634)       2,503,494
   (Decrease) increase in advance payments by borrowers for taxes and insurance        10,725         (7,220)           6,387
   Proceeds from advances from Federal Home Loan Bank                               1,000,000      6,650,000       27,000,000
   Principal payments on advances from Federal Home Loan Bank                      (8,591,977)   (10,081,998)
   Payment of dividends                                                              (154,351)      (153,963)        (144,982)
   Exercise of stock options                                                               --            660          159,585
   Treasury stock acquired                                                            (84,626)       (44,375)              --
                                                                                  -----------    -----------      -----------

          Net cash (used in) provided by financing activities                      (2,635,237)    (4,205,530)       3,461,125
                                                                                  -----------    -----------      -----------

          Net increase (decrease) in cash and cash equivalents                     (5,935,509)     1,550,401          745,377

Cash and cash equivalents at beginning of year                                      7,917,020      6,366,619        5,621,242
                                                                                  -----------    -----------      -----------

Cash and cash equivalents at end of year                                          $ 1,981,511      7,917,020        6,366,619
                                                                                  ===========    ===========      ===========

Supplemental disclosures of cash flow information:
   Cash paid for interest                                                         $ 3,344,069      3,752,446        3,794,411
   Cash paid for taxes                                                                185,082        415,750           91,102
                                                                                  ===========    ===========      ===========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


(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.

     Cash and Cash Equivalents

     For purposes of the  statements  of cash flows,  the Company  considers all
     short-term  investments  with a maturity of three months or less at date of
     purchase  to  be  cash  equivalents.  Cash  and  cash  equivalents  include
     interest-earning deposits of $1,406,000 and $5,000,000 at June 30, 2000 and
     1999, respectively.

                                                                     (Continued)
                                       20
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     Earnings Per Share

     Basic  earnings  per share is  determined  using net  income  and  weighted
     average  common shares  outstanding,  decreased by unearned  employee stock
     ownership plan (ESOP) shares.  Diluted  earnings per share,  is computed by
     dividing net income by the weighted  average  common  shares,  decreased by
     unearned  ESOP shares and  increased by assumed  incremental  common shares
     issued. Amounts used in the determination of basic and diluted earnings per
     share for the years ended June 30, 2000,  1999, and 1998 are shown in table
     below.

<TABLE>
<CAPTION>
                                                   2000           1999           1998
                                               -------------  -------------  -------------
<S>                                            <C>                <C>             <C>
Net earnings (loss)                            $    485,532       (771,771)       589,384
                                               =============  =============  =============

Weighted average common shares outstanding          868,899        879,151        862,720
Less - unearned ESOP shares                          (7,487)       (18,768)       (31,279)
                                               -------------  -------------  -------------
             Weighted average common
               shares - basic                       861,412        860,383        831,441

Assumed incremental common shares issued
    upon exercise of stock options                    9,045             --         29,425
                                               -------------  -------------  -------------
             Weighted average common
               shares - diluted                     870,457        860,383        860,866
                                               =============  =============  =============
</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  interest  and  principal  only  stripped   mortgage-backed
     securities  which are accreted and  amortized  over the period of estimated
     cash flows using the  interest  method.  Actual  prepayment  experience  on
     mortgage-backed   and  related  securities  and  stripped   mortgage-backed
     securities  is  periodically  reviewed,  and the  timing  of  accretion  or
     amortization  is  adjusted  accordingly.  Other than  temporary  unrealized
     losses are recorded in the consolidated statement of operations.

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


                                                                     (Continued)
                                       21
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


     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.

     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.


                                                                     (Continued)
                                       22
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


     Financial Instruments with Off Balance Sheet Risk

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

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

     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.  Improvements  are
     capitalized  and  subsequently   depreciated.   The  cost  and  accumulated
     depreciation of properties  retired or otherwise disposed of are eliminated
     from the asset and  accumulated  depreciation  accounts.  Related 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.

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


                                                                     (Continued)
                                       23
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


     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.


                                                                     (Continued)
                                       24
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


          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

     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
     and SFAS No. 137,  and SFAS No. 138,  amendments  to SFAS No. 133,  will be
     effective for the Company  beginning  July 1, 2000.  Management  expects to
     adopt SFAS No. 133,  SFAS No. 137, and SFAS No. 138 when  required and does
     not expect adoption to have a material effect on its financial statements.


                                                                     (Continued)
                                       25
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     (2)  Securities Available-for-sale

          Securities  available-for-sale  at June  30,  2000  and  1999  were as
          follows:

<TABLE>
<CAPTION>
                                                                           Gross            Gross
                                                        Amortized       unrealized       unrealized          Fair
                    Description                            cost            gains           losses           value
----------------------------------------------------  ---------------  --------------   --------------  ---------------

2000:
<S>                                                   <C>              <C>                     <C>             <C>
    FHLB bonds - due beyond one year,
      but within five years                           $      500,000              --           57,906          442,094
    FHLB bonds - due beyond five years,
      but within ten years                                   500,000              --           74,754          425,246
    Small Business Administration guaranteed

      loan participation certificates                        710,377              --           18,351          692,026
    Mortgage-backed and related securities:
      Mortgage-backed securities                           5,068,970              --          133,937        4,935,033
      Collateralized mortgage obligations                  7,475,355              --          342,981        7,132,374
    Mutual funds                                           1,209,417              --           18,600        1,190,817
    Equity securities                                      1,144,550           7,250          301,925          849,875
                                                      ---------------  --------------   --------------  ---------------
                                                          16,608,669           7,250          948,454       15,667,465

    Stripped mortgage-backed securities:
      Principal only                                           6,011              --            3,357            2,654
                                                      ---------------  --------------   --------------  ---------------

                                                      $   16,614,680           7,250          951,811       15,670,119
                                                      ===============  ==============   ==============  ===============

1999:
    FHLB bonds - due beyond one year,
      but within five 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
                                                      ===============  ==============   ==============  ===============
</TABLE>


                                                                     (Continued)
                                       26
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

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

                                 2000            1999             1998
                             --------------  --------------   --------------

     Proceeds                $   4,081,993       6,739,179       18,838,215
     Gross realized gains           84,857         166,347          330,031
     Gross realized losses         318,832         714,014           21,990
                             ==============  ==============   ==============


     In 1999,  the Company  recognized a write down of  $1,491,000,  on interest
     only  strip  mortgage-backed  securities  resulting  from a decline in fair
     value that was judged to be other than  temporary.  Those  deemed  impaired
     securities were sold in fiscal year 2000.

(3)  Loans Receivable

     At June 30, 2000 and 1999, loans receivable consisted of the following:


                                                2000            1999
                                           --------------  --------------

Residential real estate loans:
    One-to-four-family                     $  39,703,500      34,428,507
    One-to four-family held for sale                  --         969,243
    Multifamily                                1,234,436       1,338,804
    Construction                               1,245,413         151,809
                                           --------------  --------------

                                              42,183,349      36,888,363

Commercial real estate loans                   6,635,612       5,427,615
                                           --------------  --------------

             Total real estate                48,818,961      42,315,978
                                           --------------  --------------

Consumer loans:
    Automobile                                 3,906,348       3,990,454
    Home improvement                             778,223       1,047,558
    Deposit accounts                             123,208         148,990
    Other                                      2,645,555       2,098,553
                                           --------------  --------------

             Total consumer                    7,453,334       7,285,555
                                           --------------  --------------

Commercial business loans                      6,547,696       6,871,944
                                           --------------  --------------

                                              62,819,991      56,473,477

Less:
    Deferred fees and discounts                   23,581          64,088
    Allowance for losses on loans                379,015         342,990
                                           --------------  --------------

                                           $  62,417,395      56,066,399
                                           ==============  ==============


                                                                     (Continued)
                                       27
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     At June 30, 2000, the Bank had committed to originate $880,050 of fixed and
     variable rate loans. In addition,  the Bank had customers with unused lines
     of credit totaling $1,859,443 at June 30, 2000.

     At June 30, 2000 and 1999, the Bank had nonaccrual  loans of $1,099,000 and
     $1,161,000,  respectively.  The  allowance  for losses on loans  related to
     these impaired loans was approximately $159,900 and $97,000,  respectively.
     The average balances of such loans for the years ended June 30, 2000, 1999,
     and 1998, were $979,750,  $1,192,000, and $745,000,  respectively.  For the
     years ended June 30, 2000, 1999, and 1998, interest income which would have
     been  recorded  under the  original  terms of such loans was  approximately
     $144,152, $133,853, and $96,000, respectively, and interest income actually
     recorded  amounted  to  approximately   $78,300,   $72,000,   and  $48,000,
     respectively.

     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, 2000 and 1999 were as follows:

                                            2000           1999
                                        -------------  -------------

     Balance at beginning of year       $     73,898        285,074
     Repayments                               (4,273)      (211,176)
                                        -------------  -------------

     Balance at end of year             $     69,625         73,898
                                        =============  =============


(4)  Allowance for Losses on Loans

     Following is a summary of the  allowance  for losses on loans for the three
     years ended June 30, 2000:


                                         2000           1999         1998
                                     -------------  -----------  -----------

     Balance at beginning of year    $    342,990      348,474      348,028
     Provision for losses on loans         96,000      138,540       94,000
     Charge-offs                          (62,296)    (168,549)     (96,388)
     Recoveries                             2,321       24,525        2,834
                                     -------------  -----------  -----------

     Balance at end of year          $    379,015      342,990      348,474
                                     =============  ===========  ===========

(5)  Real Estate

     Following is a summary of real estate as of June 30, 2000 and 1999:

                                                   2000           1999
                                               -------------  -------------

     Real estate acquired through foreclosure  $         --             --
     Real estate acquired for investment            248,951        270,779
                                               -------------  -------------

                                               $    248,951        270,779
                                               =============  =============

     There were no allowances for losses on real estate for the years ended June
     30, 2000, 1999, and 1998, respectively.


                                                                     (Continued)
                                       28
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


(6)  Office Property and Equipment

     At June 30, 2000 and 1999, the cost and accumulated  depreciation of office
     property and equipment were as follows:

                                             2000             1999
                                         --------------  ---------------

     Land                                $     216,595          216,595
     Office buildings                        1,175,525        1,092,164
     Furniture, fixtures and equipment       1,008,462        1,154,698
     Automobile                                 18,883           18,883
                                         --------------  ---------------

                                             2,419,465        2,482,340

     Less accumulated depreciation           1,369,644        1,393,287
                                         --------------  ---------------

                                         $   1,049,821        1,089,053
                                         ==============  ===============

(7)  Accrued Interest Receivable

     At June 30, 2000 and 1999,  accrued  interest  receivable  consisted of the
     following:

                                            2000             1999
                                       --------------  ---------------

     Loans receivable                  $     500,796          433,651
     Securities available-for-sale           101,969           88,470
                                       --------------  ---------------

                                       $     602,765          522,121
                                       ==============  ===============

(8)  Deposits

     Deposit  account  balances  at June 30,  2000 and  1999 are  summarized  as
     follows:

                                        2000             1999
                                   --------------  ---------------

     Balance by account type:
         Savings                   $  23,380,371       23,442,674
         Money market                    342,875          462,859
         Demand and NOW                8,535,229        7,366,239
         Certificates of deposit      32,502,749       28,304,460
                                   --------------  ---------------

                                   $  64,761,224       59,576,232
                                   ==============  ===============


     The aggregate amount of certificates of deposit with a minimum denomination
     of $100,000 was  approximately  $4,939,832  and $2,188,000 at June 30, 2000
     and 1999, respectively.


                                                                     (Continued)
                                       29
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


     At June 30, 2000,  scheduled  maturities of certificates of deposit were as
     follows:

                         2001             $    20,698,951
                         2002                   6,949,816
                         2003                   3,271,896
                         2004                   1,171,351
                  2005 and thereafter             410,735
                                            --------------

                                          $    32,502,749
                                            ==============

     Interest expense on deposits is summarized as follows:


                                              Years ended June 30
                                  -------------------------------------------
                                      2000           1999           1998
                                  -------------  -------------  -------------

     Savings                      $  1,055,175        950,097        742,894
     Money market                       10,359         12,745         17,843
     Demand and NOW                    162,401        131,810        104,480
     Certificates of deposit         1,481,615      1,542,291      1,898,633
                                  -------------  -------------  -------------

                                  $  2,709,550      2,636,943      2,763,850
                                  =============  =============  =============


     At June 30, 2000 and 1999,  accrued  interest  payable on deposits  totaled
     $352,438 and $248,686, respectively.

(9)  Advances from FHLB

     Advances from FHLB at June 30, 2000 and 1999, were as follows:

<TABLE>
<CAPTION>
                                                           2000                               1999
                                              -------------------------------    -------------------------------
                                                                 Weighted-                         Weighted-
                                                                  average                           average
                                                 Amount            rates            Amount           rates
                                              --------------   --------------    --------------  ---------------

     Advance maturity:
        <S>                                   <C>               <C>              <C>              <C>
         Within one year:
           Variable                           $   1,500,000             6.79     $          --               --
           Fixed                                    899,701             5.89           870,712             5.50
         Beyond one year, but within
           five years - Fixed                     3,000,000             5.44         1,100,263             4.93
         Beyond five years, but within
           ten years - Fixed                      3,200,000             5.14        14,200,000             5.02
         Beyond ten years, but within
           fifteen years - Fixed                    414,498             5.50           435,201             5.50
                                              --------------   ==============    --------------  ===============

                                              $   9,014,199                      $  16,606,176
                                              ==============                     ==============

</TABLE>

                                                                     (Continued)
                                       30
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

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

(10) Taxes on Income

     Taxes on income for the years ended June 30, 2000,  1999, and 1998, were as
     follows:

<TABLE>
<CAPTION>
                                 2000                                        1999
               ------------------------------------------  ------------------------------------------
                 Federal        State          Total         Federal        State          Total
               ------------- -------------  -------------  ------------- -------------  -------------
<S>            <C>                 <C>           <C>           <C>            <C>           <C>
Current        $    250,100        44,000        294,100       (437,600)      (92,000)      (529,600)
Deferred            (48,000)       (7,000)       (55,000)        49,000        14,000         63,000
               ------------- -------------  -------------  ------------- -------------  -------------

               $    202,100        37,000        239,100       (388,600)      (78,000)      (466,600)
               ============= =============  =============  ============= =============  =============

<CAPTION>

                                1998
              ------------------------------------------
                Federal        State          Total
              ------------- -------------  -------------
<S>           <C>                 <C>           <C>
Current       $    229,700        65,000        294,700
Deferred            19,000         3,000         22,000
              ------------- -------------  -------------

              $    248,700        68,000        316,700
              ============= =============  =============
</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,
                                         ------------------------------------
                                            2000         1999         1998
                                         ----------   ----------   ----------

Federal income tax rate                    34.0 %       (34.0)        34.0
Items affecting federal income tax rate:
    State tax, net of federal benefit       3.4          (4.2)         4.9
    Low income housing tax credits         (5.8)         (3.4)        (4.6)
    Other, net                              1.4           3.9          0.7
                                         ----------   ----------   ----------

                                           33.0 %       (37.7)        35.0
                                         ==========   ==========   ==========



                                                                     (Continued)
                                       31
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     The tax  effects of  temporary  differences  that give rise to  significant
     portions of the deferred tax assets and  deferred tax  liabilities  at June
     30, 2000 and 1999 are presented below:

<TABLE>
<CAPTION>
                                                                2000          1999
                                                            -----------    ----------
<S>                                                          <C>              <C>

Deferred tax assets:
     Accrued expenses not deducted                           $   50,000       30,000
     Unrealized losses on securities
         available-for-sale                                     345,300      274,000
     State net operating loss                                    13,000       13,000
     Loan loss allowance                                        100,000       66,000
                                                             -----------   ----------

                    Total gross deferred tax assets             508,300      383,000
                                                             -----------   ----------

Deferred tax liabilities:
     FHLB stock dividends                                        34,000       57,000
     Accrued interest receivable not taxed                        3,000        3,000
     Deferred loan fees                                          91,000       69,000
                                                             -----------   ----------

                    Total gross deferred tax liabilities        128,000      129,000
                                                             -----------   ----------

                    Net deferred tax assets                  $  380,300      254,000
                                                             ===========   ==========
</TABLE>

     At June  30,  2000 and  1999,  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,  2000 and 1999  were
     substantially restricted because of the effect of these income tax bad debt
     reserves.

     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 the benefit
     cost accrued.


                                                                     (Continued)
                                       32
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     The  following  table  sets  forth the plan's  funded  status  and  amounts
     recognized in the  consolidated  financial  statements at June 30, 2000 and
     1999:

<TABLE>
<CAPTION>
                                                           2000            1999
                                                     --------------  --------------

Change in benefit obligation:
<S>                                                  <C>                 <C>
    Benefit obligation at beginning of year          $   1,388,500       1,044,684
    Service cost                                            86,255          67,394
    Interest cost                                           79,839          65,293
    Actuarial (gain)/loss                                 (514,755)        211,129
    Benefits paid                                          (23,353)             --
                                                     --------------  --------------

    Benefit obligation at end of year                $   1,016,486       1,388,500
                                                     ==============  ==============

Change in plan assets:
    Fair value of plan assets at beginning of year   $   1,189,278       1,048,560
    Actual return on plan assets                           106,095          49,309
    Employer contributions                                      --          91,409
    Benefits paid                                          (23,353)             --
                                                     --------------  --------------

    Fair value of plan assets and end of year        $   1,272,020       1,189,278
                                                     ==============  ==============

Reconciliation of funded status:
    Funded status (underfunded)/overfunded           $     255,534        (199,222)
    Unrecognized net actuarial (gain)/loss                (359,165)        161,153
    Unrecognized transition asset                          (13,064)        (14,825)
                                                     --------------  --------------

             Accrued benefit cost                    $    (116,695)        (52,894)
                                                     ==============  ==============
</TABLE>


                                                                     (Continued)
                                       33
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     The net periodic  benefit cost for the years ended June 30, 2000, 1999, and
     1998 includes the following components:

<TABLE>
<CAPTION>
                                                           Years ended June 30,
                                                -------------------------------------------
                                                    2000           1999           1998
                                                -------------  -------------  -------------
<S>                                             <C>                  <C>            <C>
Service cost                                    $     86,255         67,394         61,554
Interest cost                                         79,839         65,293         59,256
Expected return on plan assets                      (101,910)       (84,169)       (63,749)
Recognized net actuarial gain                          1,378             --             --
Amortization of transition (asset)/obligation         (1,761)        (1,761)        (1,761)
                                                -------------  -------------  -------------

          Net periodic benefit cost             $     63,801         46,757         55,300
                                                =============  =============  =============
</TABLE>


                                              2000               1999
                                          --------------    ---------------

Discount rate                                      7.00%              5.75%

Expected long-term rate of return                  8.25               8.25

Weighted-average rate of compensation
 increase                                          5.09               5.09

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, 2000
     and 1999,  76,712 and 66,168  shares,  respectively,  were  committed to be
     released,  and the fair  value of the 954 and  11,498  unearned  shares was
     approximately $6,917 and $96,000. ESOP expense was $83,513,  $153,154,  and
     $163,843 for the years ended June 30, 2000, 1999, and 1998, respectively.

     Employment Agreements

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

     Stock Options

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


                                                                     (Continued)
                                       34
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


     Changes in options  outstanding and exercisable  during 2000 and 1999, were
     as follows:

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

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

Vested                           --                 --
Exercised                        --                 --
                   -----------------  -----------------

June 30, 2000                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, and 1998,
     was  $11,439,  and  $36,216,  respectively,  and all costs  have been fully
     amortized in fiscal year 2000.

(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.


                                                                     (Continued)
                                       35
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

     The Federal Deposit Insurance Corporation  Improvement Act of 1991 (FDICIA)
     established additional capital requirements which require regulatory action
     against depository  institutions in one of the undercapitalized  categories
     defined   in   implementing   regulations.   FDICIA   requires   depository
     institutions to maintain a tangible equity ratio of 2%.  Institutions  such
     as the Bank, which are defined as well  capitalized,  must generally have a
     leverage  capital (core) ratio of at least 5%, a tier I risk-based  capital
     ratio of at least 6% and a total risk-based  capital ratio of at least 10%.
     FDICIA  also  provides  for  increased  supervision  by federal  regulatory
     agencies,   increased   reporting   requirements  for  insured   depository
     institutions and other changes in the legal and regulatory  environment for
     such institutions. The Bank met all regulatory capital requirements at June
     30, 2000 and 1999.

     The Bank's  actual and required  capital  amounts and ratios as of June 30,
     2000 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)       $  6,316,000       7.8%       $  1,627,580       2.0%      $        --         --%
Leverage/equity (core) capital
    (to adjusted tangible assets)              6,316,000       7.8           3,255,160       4.0          4,068,950       5.0
Tier I risk-based capital
    (to risk-weighted assets)                  6,316,000      12.6           2,010,920       4.0          3,016,380       6.0
Risk-based (total) capital
    (to risk-weighted assets)                  6,669,000      13.3           4,021,840       8.0          5,027,300      10.0
                                            =============  ========       ============= =========      =============  ========
</TABLE>

     Dividend Restrictions

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

(13) Supervisory Agreement

     On August 23, 1999, the Bank entered into a supervisory  agreement with the
     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; and

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


                                                                     (Continued)
                                       36
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999


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

(14) Fair Value of Financial Instruments

     The estimated fair values of the Company's financial instruments as of June
     30, 2000 and 1999 were as follows:


<TABLE>
<CAPTION>
                                      Carrying           Fair           Carrying           Fair
                                        value            value           value             value
                                    --------------  ---------------   --------------  ---------------

Financial assets:
<S>                                 <C>                  <C>              <C>              <C>
    Cash and cash equivalents       $   1,981,511        1,981,511        7,917,020        7,917,020
    Securities available-for-sale      15,670,119       15,670,119       17,096,985       17,096,985
    Loans                              62,417,395       59,883,278       56,066,399       56,361,401
    FHLB stock                            702,500          702,500        1,202,500        1,202,500
    Accrued interest receivable           602,765          602,765          522,121          522,121
Financial liabilities:
    Deposits                           64,761,224       65,067,366       59,576,232       59,673,754
    FHLB advances                       9,014,199        8,167,397       16,606,176       15,350,823
    Advance payments by borrowers
      for taxes and insurance             410,555          410,555          399,830          399,830
    Accrued interest payable              352,438          352,438          248,868          248,868
                                    ==============  ===============   ==============  ===============

                                                      Unrealized                        Unrealized
                                      Notional          gains           Notional          gains
                                        value          (losses)           value          (losses)
                                    --------------  ---------------   --------------  ---------------

Off balance sheet assets:
    Commitments to extend credit    $     880,050               --        1,440,460               --
    Unused lines of credit              1,859,443               --        1,510,000               --
                                    ==============  ===============   ==============  ===============
</TABLE>


                                                                     (Continued)
                                       37
<PAGE>


                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

(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.

(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:


                            Condensed Balance Sheets

                                                 2000            1999
                                             --------------  --------------

Cash and cash equivalents                    $     253,648         409,472
Securities available-for-sale                      608,935         745,803
Loans receivable, net                            1,097,524       1,052,717
Loans receivable from subsidiary                     5,593          65,503
Investment in subsidiary                         5,908,105       5,417,889
Real estate                                        248,951         270,779
Interest receivable                                 35,412          19,623
Deferred taxes                                     119,200          64,100
Income tax receivable                                   --          14,461
                                             --------------  --------------

             Total assets                    $   8,277,368       8,060,347
                                             ==============  ==============

Total liabilities - accrued income taxes     $      11,361              --

Common stock                                        10,462          10,462
Additional paid-in capital                       5,020,361       4,996,761
Retained earnings                                5,135,636       4,804,455
Treasury stock, at cost                         (1,314,197)     (1,229,571)
Unearned ESOP shares                                (5,593)        (65,503)
Accumulated other comprehensive
    income - net unrealized loss
    on securities available-for-sale              (580,662)       (456,257)
                                             --------------  --------------

             Total equities                      8,266,007       8,060,347
                                             --------------  --------------

             Total liabilities and equity    $   8,277,368       8,060,347
                                             ==============  ==============



                                                                     (Continued)
                                       38
<PAGE>

                           HORIZON FINANCIAL SERVICES
                          CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                             June 30, 2000 and 1999

                        Condensed Statement of Operations


<TABLE>
<CAPTION>
                                                     2000           1999             1998
                                               --------------  --------------  --------------

<S>                                            <C>                    <C>            <C>
Interest income                                $     123,502          79,472         123,091
Equity in (losses) earnings of subsidiaries          461,998        (634,347)        814,876
Other expenses                                      (139,968)       (311,196)       (522,272)
                                               --------------  --------------  --------------

       Net earnings before tax                       445,532        (866,071)        415,695

Income tax benefit                                   (40,000)        (94,300)       (173,689)
                                               --------------  --------------  --------------

       Net (loss) earnings                     $     485,532        (771,771)        589,384
                                               ==============  ==============  ==============
</TABLE>

                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                        2000           1999            1998
                                                                  --------------  --------------  --------------
Operating activities:
<S>                                                               <C>                  <C>              <C>
    Net (loss) earnings                                           $     485,532        (771,771)        589,384
    Equity in losses (earnings) of subsidiary                          (461,998)        634,347        (814,876)
    Other, net                                                           58,574         370,614         288,588
                                                                  --------------  --------------  --------------

             Net cash provided by operating activities                   82,108         233,190          63,096
                                                                  --------------  --------------  --------------

Investing activities:
    Proceeds from sale of securities available-for-sale                 197,262       1,844,763       2,647,147
    Purchase of securities available-for-sale                          (211,319)     (1,510,444)     (3,445,162)
    Principal collected on securities available-for-sale                     --          88,340         599,306
    Purchase of real estate                                                  --        (100,000)             --
    Loans receivable, net                                                15,102        (549,808)       (282,449)
                                                                  --------------  --------------  --------------

             Net cash provided by (used in) investing activities          1,045        (227,149)       (481,158)
                                                                  --------------  --------------  --------------

Financing activities:
    Dividends from subsidiary                                                --         226,109         588,767
    Treasury stock acquired                                             (84,626)        (44,375)             --
    Exercise of stock options                                                --             660         159,585
    Dividends paid                                                     (154,351)       (153,963)       (144,982)
                                                                  --------------  --------------  --------------

             Net cash provided by
               (used in) financing activities                          (238,977)         28,431         603,370
                                                                  --------------  --------------  --------------

             Net (decrease) increase in
               cash and cash equivalents                               (155,824)         34,472         185,308

Cash and cash equivalents at beginning of year                          409,472         375,000         189,692
                                                                  --------------  --------------  --------------

Cash and cash equivalents at end of year                          $     253,648         409,472         375,000
                                                                  ==============  ==============  ==============
</TABLE>
                                       39
<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 26, 2000, 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.

<TABLE>
<CAPTION>

                             FISCAL 2000                                             FISCAL 1999
                 --------------------------------                     ------------------------------------

                    HIGH       LOW    DIVIDENDS                              HIGH      LOW     DIVIDENDS
                 --------------------------------                     ------------------------------------
<S>                <C>       <C>        <C>            <C>                 <C>        <C>         <C>
   First Quarter   $9.000    $7.000     $.045          First Quarter       $16.750    $14.875     $.045
   Second Quarter   8.125     6.500      .045          Second Quarter       15.750     12.500      .045
   Third Quarter    7.000     6.500      .045          Third Quarter        12.750     10.000      .045
   Fourth Quarter   7.313     5.125      .045          Fourth Quarter       10.250      7.000      .045
</TABLE>


Cash dividend  payout is  continually  reviewed by  management  and the Board of
Directors.  The  Company  intends to  continue  its  policy of paying  quarterly
dividends;  however, the payment will depend upon a number of factors, including
capital requirements, regulatory limitations, the Company's financial condition,
results of  operations  and the Bank's  ability to pay dividends to the Company.
The Company relies  significantly upon such dividends  originating from the Bank
to accumulate  earnings for payment of cash dividends to its  stockholders.  See
Notes  12  and  13 to the  Notes  to  Consolidated  Financial  Statements  for a
discussion of restrictions on the Bank's ability to pay dividends.

At September 8, 2000,  there were 845,362 shares of Horizon  Financial  Services
Corporation   common  stock  issued  and  outstanding  and   approximately   144
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

                                       40

<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                        CORPORATE COUNSEL

KPMG LLP                                    McCoy, Faulkner & Broerman
2500 Ruan Center                            216 South First Street
Des Moines, Iowa  50309                     Oskaloosa, Iowa  52577


SPECIAL COUNSEL

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

                                       41