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

                                   FORM 10-KSB

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

      For the fiscal year ended June 30, 2004

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from ___________ to _______________________

            Commission file number 0-24036

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

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

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

Registrant's telephone number, including area code: (641) 673-8328
                                                    --------------

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      None
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of class)

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

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

      State the issuer's revenues for its most recent fiscal year: $6,765,914.

      The aggregate market value of the voting stock held by  non-affiliates  of
the  Registrant,  computed  by  reference  to the average of the closing bid and
asked price of such stock as reported on the Nasdaq  System as of  September  3,
2004, was $8.64 million.  (The exclusion from such amount of the market value of
the  shares  owned  by any  person  shall  not be  deemed  an  admission  by the
Registrant that such person is an affiliate of the Registrant.)

      As of September 3, 2004, there were issued and outstanding  771,371 shares
of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended June 30, 2004.

      Part III of Form  10-KSB  - Proxy  Statement  for the  Annual  Meeting  of
Stockholders to be held in October 2004.

      Transitional Small Business Disclosure Format: YES |_|; NO |X|.

<PAGE>

                                     PART I

Item 1. Description of Business
        -----------------------

General

      The Company.  Horizon Financial  Services  Corporation (the "Company"),  a
Delaware corporation, was formed in March 1994 to act as the holding company for
Horizon Federal  Savings Bank ("Horizon  Federal" or the "Bank") upon the Bank's
conversion from the mutual to the stock form (the "Conversion"),  which occurred
on June 28, 1994. All references to the Company,  unless otherwise indicated, at
or before June 28,  1994 are to the Bank and its  subsidiary  on a  consolidated
basis. The Company's common stock trades over-the-counter on the Nasdaq Bulletin
Board under the Symbol "HZFS".

      At June 30,  2004,  the  Company  had $99.0  million  of assets  and $11.5
million of stockholders' equity (or 11.6% of total assets).

      The  executive  offices of the Company are located at 301 1st Avenue East,
Oskaloosa,  Iowa  52577,  and its  telephone  number  at that  address  is (641)
673-8328.

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

      The Bank has a mortgage loan  origination  office in Pleasant  Hill,  Iowa
which serves Polk County and surrounding areas. The Bank will establish a retail
banking office in Pleasant Hill,  Iowa which is scheduled to open in late August
of 2004.

      The principal  business of the Bank  consists of attracting  deposits from
the general public and using such deposits,  together with  borrowings and other
funds,  primarily to originate one-to-four family residential mortgage loans. To
a lesser extent, the Bank also originates  consumer loans,  commercial  business
loans,   multi-family   and  commercial   real  estate  loans  and   residential
construction  loans.  The Bank  also  invests  in  mortgage-backed  and  related
securities,  as well as investment  securities.  See  "Originations of Loans and
Mortgage-Backed  Securities." At June 30, 2004,  substantially all of the Bank's
real estate mortgage loans (excluding  mortgage-backed  securities) were secured
by properties located in Iowa.

      The Bank's  revenues  are derived  principally  from  interest on mortgage
loans and securities and service fee income.  The Bank does not originate  loans
to fund leveraged buyouts and has no loans to non-United States  corporations or
foreign governments.

      The Bank  currently  offers a variety  of deposit  accounts  having a wide
range of  interest  rates and terms.  The  Bank's  deposits  include  commercial
demand, savings, checking, money


                                       1
<PAGE>

market and certificate accounts.  The Bank only solicits deposits in its primary
market area and does not accept brokered deposits.

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

      During  fiscal 1995,  the Company  entered into a joint venture low income
apartment  housing  project to take advantage of certain tax benefits  available
under Section 42 of the Internal Revenue Code of 1986, as amended. The apartment
housing  project is composed of 62 units and is located in Des Moines,  Iowa. At
June 30,  2004,  the  Company's  equity  investment  in the project was $99,390,
representing a 16.5% limited  partnership  interest in the project.  The Company
will receive tax credits of approximately $42,000 per year through 2005.

Forward-Looking Statements

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

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

Market Area

      Horizon Federal primarily serves Mahaska County and that portion of Marion
County in and around Knoxville,  Iowa. The Bank has three offices,  two of which
are  located in  Oskaloosa,  Iowa and one which is located in  Knoxville,  Iowa,
approximately  25  miles  west of  Oskaloosa.  In 2003  the  Bank  opened a loan
production  office  in  Pleasant  Hill,  Iowa,  a suburb on the East side of Des
Moines,  Iowa.  This  office  is  currently  making  single  family  residential
construction  and end loans in Polk County and  surrounding  counties.  The Bank
competes in loan originations and in deposit  gathering  activities with the ten
financial  institutions and three credit unions serving its primary market area.
See  "Competition."  The Bank  estimates its share of the savings  market in its
primary market area to be approximately 18%.


                                       2
<PAGE>

      Oskaloosa,  Iowa is  located  in Mahaska  County,  approximately  60 miles
southeast of Des Moines,  Iowa. Mahaska County has a population of approximately
22,000.  Oskaloosa,  with a current  population of approximately  10,500, is the
county seat and the largest city in Mahaska County.  Oskaloosa  primarily has an
agricultural  economy  and,  to a lesser  extent,  light  industrial  and retail
economies.  Its  light  industrial  economy,  however,  is  mainly  agricultural
support.  Major employers in the area include the Clow Valve Company,  the Pella
Corporation,  Cargill, Musco Lighting,  Vermeer Manufacturing,  the V.A. Medical
Center, 3-M Company, William Penn University and the Mahaska County Hospital.

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

      Mahaska and Marion County economic  conditions and strong  competition may
affect the financial  condition and results of operations of the Company and the
Bank. In the event current economic and market  conditions  persist or worsen in
the Mahaska and Marion  County  markets,  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.  Additionally,
the  establishment of a branch office typically  affects net income adversely in
the short  term  until  business  reaches  a level  consistent  with  profitable
operations. Conversely, these results could be positively affected by the Bank's
expansion of its lending area.

Lending Activities of the Bank

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

      See  "Originations of Loans and  Mortgage-Backed  Securities." At June 30,
2004, the Bank's net loan portfolio totaled $79.4 million.

      Several  loan  officers  of the  Bank  and all  members  of the  Board  of
Directors  serve as Loan  Committee  members on a rotating  basis.  At any given
time,  the  approval of at least  three  directors  is required to approve  real
estate loans over $200,000. Loan Committee approval is


                                       3
<PAGE>

currently  required  for  unsecured  and  secured  consumer  loans of more  than
$100,000  and  $120,000,  respectively,  and  unsecured  and secured  commercial
business  loans of more than $50,000 and  $200,000,  respectively.  The Board of
Directors  must approve all commercial  business loans with a balance  exceeding
$350,000.

      The  aggregate  amount of loans that the Bank is  permitted  to make under
applicable federal regulations to any one borrower,  including related entities,
or the aggregate  amount that the Bank can invest in any one real estate project
is, with certain exceptions,  generally the greater of 15% of unimpaired capital
and  surplus or  $500,000.  See  "Regulation  -- Federal  Regulation  of Savings
Banks." At June 30,  2004,  the maximum  amount which the Bank could lend to any
one borrower and the borrower's  related  entities under the applicable  federal
regulations was approximately $1,510,200. However, at June 30, 2004 the Board of
Directors of the Bank had a self-imposed $1,000,000 general limitation.

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


                                       4
<PAGE>

      Portfolio Composition. The following table presents the composition of the
Bank's loan portfolio in dollar amounts and in  percentages  (before  deductions
for loans in process,  deferred fees and discounts and allowances for losses) as
of the dates indicated.

<TABLE>
<CAPTION>
                                                                                   At June 30,
                                                 --------------------------------------------------------------------------------
                                                          2004                         2003                         2002
                                                 ----------------------       ----------------------       ----------------------
                                                  Amount        Percent        Amount        Percent        Amount        Percent
                                                 -------        -------       -------        -------       -------        -------
                                                                              (Dollars in Thousands)
<S>                                              <C>              <C>         <C>              <C>         <C>              <C>
Real Estate:
------------
 One-to-four family .........................    $36,619           45.7%      $34,975           53.3%      $38,553           58.7%
 Commercial real estate .....................      6,241            7.8         7,117           10.9         7,020           10.7
 Multi-family ...............................        413             .5           796            1.2         1,363            2.1
 Residential construction ...................      7,106            8.9         2,357            3.6         1,475            2.2
                                                 -------        -------       -------        -------       -------        -------
     Total real estate loans ................     50,379           62.9        45,245           69.0        48,411           73.7
                                                 -------        -------       -------        -------       -------        -------

Other Loans:
------------
 Consumer Loans:
  Automobile ................................      3,113            3.9         2,996            4.6         3,171            4.8
  Home improvement ..........................         70             .1            86             .1           299             .5
  Deposit account ...........................        227             .3           297             .4           265             .4
  Other .....................................      4,404            5.5         3,656            5.6         3,121            4.8
                                                 -------        -------       -------        -------       -------        -------
     Total consumer loans ...................      7,814            9.8         7,035           10.7         6,856           10.5
 Commercial business loans ..................     21,910           27.3        13,308           20.3        10,386           15.8
                                                 -------        -------       -------        -------       -------        -------
     Total other loans ......................     29,724           37.1        20,343           31.0        17,242           26.3
                                                 -------        -------       -------        -------       -------        -------
     Total loans receivable, gross ..........     80,103          100.0%       65,588          100.0%       65,653          100.0%
                                                                =======                      =======                      =======

Less:
-----
 Deferred fees and discounts.................         27                           25                           17
 Allowance for losses........................        697                          556                          537
                                                 -------                      -------                      -------
 Total loans receivable, net.................    $79,379                      $65,007                      $65,099
                                                 =======                      =======                      =======
</TABLE>


                                       5
<PAGE>

      The following  table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.

<TABLE>
<CAPTION>
                                                                                        At June 30,
                                                           ----------------------------------------------------------------------
                                                                   2004                     2003                     2002
                                                           --------------------     --------------------     --------------------
                                                            Amount      Percent      Amount      Percent      Amount      Percent
                                                           -------      -------     -------      -------     -------      -------
                                                                                   (Dollars in Thousands)
<S>                                                        <C>            <C>       <C>            <C>       <C>            <C>
Fixed-Rate Loans:
-----------------
   Real estate:
      One-to-four family ..............................    $12,315         15.4%    $11,826         18.0%    $10,891         16.6%
      Commercial real estate ..........................      2,599          3.2       3,318          5.1       2,882          4.4
      Multi-family ....................................        413           .5         796          1.2         854          1.3
      Residential construction ........................      5,126          6.4       2,357          3.6       1,475          2.2
                                                           -------      -------     -------      -------     -------      -------
        Total fixed-rate real estate loans ............     20,453         25.5      18,297         27.9      16,102         24.5

      Consumer ........................................      7,623          9.5       6,845         10.4       6,800         10.4
      Commercial business .............................     14,275         17.9      10,187         15.6       8,676         13.2
                                                           -------      -------     -------      -------     -------      -------
        Total fixed-rate loans ........................     42,351         52.9      35,329         53.9      31,578         48.1
                                                           -------      -------     -------      -------     -------      -------

Adjustable-Rate Loans:
----------------------
   Real estate:
      One-to-four family ..............................     24,304         30.3      23,149         35.3      27,662         42.1
      Commercial real estate ..........................      3,642          4.6       3,799          5.8       4,138          6.3
      Multi-family ....................................         --           --          --           --         509           .8
      Residential construction ........................      1,980          2.5          --           --          --           --
                                                           -------      -------     -------      -------     -------      -------
        Total adjustable-rate real estate loans .......     29,926         37.4      26,948         41.1      32,309         49.2

      Consumer ........................................        191           .2         190           .3          56           .1
      Commercial business .............................      7,635          9.5       3,121          4.7       1,710          2.6
                                                           -------      -------     -------      -------     -------      -------
        Total adjustable-rate loans ...................     37,752         47.1      30,259         46.1      34,075         51.9
                                                           -------      -------     -------      -------     -------      -------
        Total loans, receivable, gross ................     80,103        100.0%     65,588        100.0%     65,653        100.0%
                                                                        =======                  =======                  =======

Less:
-----
   Deferred fees and discounts ........................         27                       25                       17
   Allowance for loan losses ..........................        697                      556                      537
                                                           -------                  -------                  -------
        Total loans receivable, net....................    $79,379                  $65,007                  $65,099
                                                           =======                  =======                  =======
</TABLE>


                                       6
<PAGE>

      The  following  table  illustrates  the interest rate  sensitivity  of the
Bank's loan portfolio at June 30, 2004. Mortgages which have adjustable interest
rates are shown as maturing in the period  during which the contract is due. The
table does not reflect the effects of possible  prepayments  or  enforcement  of
due-on-sale clauses.

<TABLE>
<CAPTION>
                                      Real Estate
                        -----------------------------------------
                                                   Residential                                 Commercial
                             Mortgage(1)          Construction            Consumer               Business              Total
                        -------------------    ------------------    ------------------     ------------------   ------------------
                                   Weighted              Weighted              Weighted               Weighted             Weighted
                                    Average               Average               Average                Average              Average
                         Amount      Rate       Amount     Rate       Amount      Rate       Amount     Rate      Amount     Rate
                        -------    --------    -------   --------    -------   --------     -------   --------   -------   --------
                                                                   (Dollars in Thousands)
      Due During
     Years Ending
       June 30,
----------------------
<S>                     <C>          <C>       <C>         <C>       <C>          <C>       <C>         <C>      <C>         <C>
2005(2) ..............  $12,215      6.39%     $ 6,950     6.14%     $ 1,861      8.35%     $10,908     7.25%    $31,934     6.74%
2006 to 2009 .........   10,419      6.65          156     6.00        4,267      8.48        7,803     6.30      22,465     6.87
2010 and following ...   20,639      6.64           --       --        1,686      7.37        3,199     7.12      25,524     6.75
                        -------                -------               -------                -------              -------
   Total..............  $43,273      6.57%     $ 7,106     6.14%     $ 7,814      8.21%     $21,910     6.89%    $80,103     6.78%
                        =======                =======               =======                =======              =======
</TABLE>

----------

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

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


                                       7
<PAGE>

      The  total  amount  of loans  that are due  after  June 30,  2005 and have
predetermined  interest rates is $37.4 million,  while the total amount of loans
due after such date with floating or adjustable interest rates is $10.8 million.

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

      The Bank currently originates ARM loans and fixed-rate loans for retention
in the  Bank's  loan  portfolio.  During the  fiscal  year  ended June 30,  2004
("fiscal  2004"),   the  Bank  originated  $10.3  million  of   adjustable-rate,
one-to-four  family real estate loans  (including  $2.6  million of  residential
construction  loans) and $25.1  million of fixed-rate  one-to-four  family loans
(including  $8.3  million  of  residential   construction   loans).  The  Bank's
one-to-four family residential mortgage originations are primarily in its market
area.

      The  Bank  currently   originates   adjustable-rate,   one-to-four  family
residential  mortgage  loans with a maximum term of 30 years.  Fixed-rate  loans
originated for its portfolio are generally originated up to a maximum term of 30
years.  Fixed-rate  mortgage loans  originated by the Bank in excess of 15 years
are generally sold in the secondary market. The Bank originated $12.3 million of
fixed-rate loans for sale during fiscal 2004.

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

      The Bank currently offers one-year, three-year and five-year balloon loans
that convert into ARM loans with annual adjustment after the initial term. Rates
are determined in accordance with market and competitive factors. The Bank's ARM
products  generally  carry  interest  rates which,  pursuant to the terms of the
note, may be reset to a stated margin over the index utilized by the Bank, which
is currently the National  Average Contract Rate for Previously Owned Homes. The
adjustable-rate  loans currently originated by the Bank provide for a maximum 2%
annual cap, and a maximum 6% lifetime cap on the interest  rate over the rate in
effect on the date of origination. The annual and lifetime caps on interest rate
increases  reduce  the extent to which  these  loans can help  protect  the Bank
against  interest  rate risk and may cause these loans not to be as sensitive as
the  Bank's  cost of  funds.  The  Bank's  ARM loans  are not  convertible  into
fixed-rate loans. All of the Bank's  one-to-four family loans are not assumable,
do not contain  prepayment  penalties and do not produce negative  amortization.
Approximately  31.1% of the loans  secured by  one-to-four  family  real  estate
originated by the Bank during fiscal 2004 were originated with adjustable  rates
of interest. See "Originations of Loans and Mortgage-Backed Securities."


                                       8
<PAGE>

      At June 30, 2004, the Bank was not servicing any loans other than loans it
originated.  As of June 30,  2004,  the Bank's  residential  ARM loan  portfolio
totaled $24.3  million,  or 30.3% of the Bank's gross loan portfolio as compared
to the  residential  fixed-rate,  mortgage  loan  portfolio  which totaled $12.3
million,  or 15.4% of the Bank's gross loan  portfolio.  ARM loans  decrease the
risk  associated  with  changes  in  interest  rates but  involve  other  risks,
primarily  because as interest  rates rise, the payment by the borrower may rise
to the  extent  permitted  by the  terms of the  loan,  thereby  increasing  the
potential  for default.  At the same time,  the market  value of the  underlying
property may be adversely affected by higher interest rates increasing potential
losses from defaults.

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

      At June 30, 2004, non-performing  one-to-four family residential mortgages
totaled $1.4 million, or 4.0% of total one-to-four family residential  mortgages
and 1.8% of the Bank's gross loan portfolio. See "Asset Quality - Non-Performing
Assets."

      To  supplement  loan  demand in the Bank's  primary  market  area the Bank
purchases  mortgage-backed  and  related  securities.  The Bank  purchased  $2.2
million, $6.4 million and $4.9 million of mortgage-backed and related securities
during fiscal 2004, the fiscal year ended June 30, 2003 ("fiscal  2003") and the
fiscal year ended June 30, 2002 ("fiscal 2002"), respectively. See "Originations
of Loans and Mortgage-Backed Securities."

      Residential  Construction  Lending.  The Bank makes  construction loans to
individuals for the  construction of their residences and, from time to time, to
established  builders and developers for the  construction of residential  homes
without an underlying sales contract.  At June 30, 2004, the Bank's construction
loan portfolio totaled $7.1 million, or 8.9% of its gross loan portfolio.  As of
that date  substantially all of these loans were in the Company's primary market
area.

      Construction  loans to individuals for their  residences are structured to
be  converted  to  permanent  loans at the end of the  construction  phase which
typically runs from six months to one year. These  construction loans have rates
and terms which match one-to-four  family loans then offered by the Bank, except
that during the construction  phase the borrower pays interest only. The maximum
loan-to-value  ratio of owner occupied single family  construction loans is 95%.
Residential  construction loans are generally  underwritten pursuant to the same
guidelines used for originating  permanent one-to-four family residential loans.
The application process for construction loans includes a submission to the Bank
of the plans and costs of the project to be


                                       9
<PAGE>

constructed. These items are used as a basis to determine the appraised value of
the subject  property.  Loans are based on the lesser of current appraised value
or the cost of construction (land plus building).

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

      Multi-Family/Commercial  Real Estate  Lending.  Horizon Federal also makes
real  estate  loans  secured by  multi-family  and  non-residential  properties.
Horizon  Federal's  multi-family  residential  loans are  primarily  secured  by
apartment  buildings  located within the Bank's market area. The commercial real
estate loans originated by the Bank are primarily  secured by office  buildings,
churches, storage facilities, and other income-producing properties. At June 30,
2004,  $413,000,  or 0.5%,  of the Bank's  gross  loan  portfolio  consisted  of
multi-family loans and $6.2 million, or 7.8%, of the Bank's gross loan portfolio
consisted of commercial real estate loans.

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

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

      At June 30, 2004, the Bank had no  multi-family  or commercial real estate
loans to one  borrower,  or group of borrowers,  which had an existing  carrying
value in excess of $630,000.  The Bank had only six commercial and  multi-family
real estate loans which  exceeded  $300,000 at June 30, 2004,  all of which were
performing in accordance with their repayment terms.

      Multi-family  and  commercial  real  estate  lending  affords  the Bank an
opportunity to receive  interest at rates higher than those generally  available
to one-to-four family residential lending.  Nevertheless,  loans secured by such
properties  are  generally  larger  and  involve a  greater  degree of risk than
one-to-four family residential mortgage loans. Because payments on


                                       10
<PAGE>

loans secured by multi-family  and commercial  real estate  properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse  conditions in the real estate market or
the  economy.  If the cash flow from the  project is reduced  (for  example,  if
leases are not obtained or renewed),  the  borrower's  ability to repay the loan
may be impaired. Horizon Federal's current lending guidelines generally require,
in the case of loans  secured by  multi-family  or  commercial  income-producing
property,  that the property  securing such loans generate net cash flow of 125%
of debt service after payment of all operating expenses, excluding depreciation,
and a loan-to-value ratio of no more than 75%.

      At June 30, 2004,  non-performing  multi-family and commercial real estate
loans totaled $82,000,  or 1.3% of total multi-family and commercial real estate
loans  and  .1% of the  Bank's  gross  loan  portfolio.  See  "Asset  Quality  -
Non-Performing Assets."

      Consumer Lending. Management believes that offering consumer loan products
helps  reinforce  and expand the Bank's  customer  base.  In  addition,  because
consumer loans generally have shorter terms to maturity and/or  adjustable rates
and carry higher rates of interest than do residential  mortgage loans, they can
be useful  asset/liability  management tools. See  "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations  --  Asset/Liability
Management" in the Annual Report to  Stockholders  attached hereto as Exhibit 13
(the "Annual Report").  The Bank currently  originates  substantially all of its
consumer loans in its primary market area. At June 30, 2004, the Bank's consumer
loans totaled $7.8 million, or 9.8% of the Bank's gross loan portfolio.

      Horizon  Federal offers a variety of consumer  loans for various  purposes
with terms up to 15 years.  The majority of lending is for automobiles and other
personal  purposes.  At June 30, 2004,  the  outstanding  balances on automobile
loans  totaled  $3.1  million,  or  3.9%,  of the  Bank's  gross  consumer  loan
portfolio.

      In addition, Horizon Federal offers Visa and MasterCard credit cards. Both
types of lending generally present more credit risk to the Bank than one-to-four
family  residential  lending.  At June 30, 2004,  the Bank had $31,500 of credit
card loans  outstanding and $231,000 of unused credit available under its credit
card program.

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

      Consumer loans may entail greater risk than do residential mortgage loans,
particularly  in the case of consumer loans which are unsecured,  or are secured
by  rapidly  depreciable  assets  such  as  automobiles.   In  such  cases,  any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the  outstanding  loan balance as a result of the greater
likelihood  of  damage,  loss  or  depreciation.   In  addition,  consumer  loan
collections are dependent on the borrower's  continuing  financial stability and
thus  are  more  likely  to  be  affected  by  adverse  personal  circumstances.
Furthermore,  the  application  of various  federal  and state  laws,  including
bankruptcy and insolvency laws, may limit the amount which can be recovered


                                       11
<PAGE>

on such loans. At June 30, 2004, non-performing consumer loans totaled $251,000,
or 3.2% of total consumer loans and .3% of the Bank's gross loan portfolio.  See
"Asset Quality - Non-Performing Assets."

      Commercial Business Lending. The Bank also originates  commercial business
loans. The Bank offers commercial  business loans to service existing customers,
to consolidate its banking  relationships  with these customers,  and to further
its  asset/liability  management goals.  Most of the Bank's commercial  business
loans have been  extended to finance  local  businesses  and include  short-term
loans to finance  machinery  and  equipment  purchases,  inventory  and accounts
receivable.  Commercial loans also involve the extension of revolving credit for
a  combination  of  equipment  acquisitions  and  working  capital in  expanding
companies. At June 30, 2004, commercial business loans totaled $21.9 million, or
27.3% of the Bank's gross loan portfolio.

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

      The two largest  commercial  business  loans  outstanding at June 30, 2004
were a $1.25  million  business  line of  credit  to a local  telecommunications
company and a $1.1 million loan to a local  university.  At June 30, 2004, these
lines of credit were performing in accordance with their  repayment  terms.  The
Bank had only fourteen other commercial  business loans in excess of $300,000 at
June 30, 2004, all of which were  performing in accordance  with their repayment
terms at such date.

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

      The Bank recognizes the generally  increased  credit risks associated with
commercial and industrial lending.  Horizon Federals commercial business lending
policy emphasizes assessment of past, present and future cash flows, analysis of
the borrower's character,  management capabilities,  capacity to repay the loan,
the adequacy of the  borrower's  capital and  collateral.  Thorough  credit file
documentation   is  also  an  important   aspect  of  Horizon   Federals  credit
administration.  At June 30,  2004,  non-performing  commercial  business  loans
totaled  $843,000,  or 3.8% of total commercial  business loans and 1.05% of the
Bank's gross loan portfolio. See "Asset Quality - Non-Performing Assets."


                                       12
<PAGE>

Originations of Loans and Mortgage-Backed Securities

      The Bank  originates  real estate loans  through  marketing  efforts,  the
Bank's customer base,  walk-in  customers and referrals from real estate brokers
and builders. The Bank originates both adjustable-rate and fixed-rate loans. Its
ability to originate  loans is dependent upon the relative demand for fixed-rate
or ARM loans in the origination market,  which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and  competition.  During each of fiscal
2004,  2003 and 2002 the Bank's  dollar  volume of fixed rate real  estate  loan
originations exceeded its adjustable-rate real estate loan originations.

      The Bank does not  generally  purchase  loans or loan  participations.  In
times of low levels of loan  demand,  the Bank has  invested its excess funds in
mortgage-backed  and related  securities.  During fiscal 2004, 2003 and 2002 the
Bank purchased $2.2, $6.4 and $4.9 million, respectively, of mortgage-backed and
related  securities.  During  fiscal  2004,  the Bank  funded its  purchases  of
mortgage-backed  and related  securities  primarily with sales and repayments of
mortgage loans and mortgage-backed and related securities and customer deposits.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management" in the Annual Report.


                                       13
<PAGE>

      The  following  table shows the loan  origination,  purchase and repayment
activities of the Bank for the periods indicated.

<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                                       ----------------------------------------
                                                         2004            2003            2002
                                                       --------        --------        --------
                                                                (Dollars in Thousands)
<S>                                                    <C>             <C>             <C>
Originations by type:
---------------------
 Adjustable-rate:
  Real estate
   - One-to-four family ............................   $  7,612        $  5,858        $  7,296
   - Multi-family ..................................         --              --              --
   - Commercial real estate ........................        503             451           1,504
   - Residential construction ......................      2,640             126              --
  Non-real estate
   - Consumer ......................................         --             178              --
   - Commercial business ...........................      4,056           1,083           1,238
                                                       --------        --------        --------
         Total adjustable-rate .....................     14,811           7,696          10,038
                                                       --------        --------        --------

 Fixed-rate:
  Real estate
   - One-to-four family ............................     16,858          10,511           8,980
   - Multi-family ..................................         --              --              --
   - Commercial real estate ........................        250             950           1,338
   - Residential construction ......................      8,269           3,279           3,520
  Non-real estate
   - Consumer ......................................      6,909           6,116           5,556
   - Commercial business ...........................     11,596           6,002           4,882
                                                       --------        --------        --------
         Total fixed-rate ..........................     43,882          26,858          24,276
                                                       --------        --------        --------
         Total loans originated ....................     58,693          34,554          34,314

Total loan purchases ...............................         --              --              --
Total loan sales ...................................    (12,452)        (10,420)        (11,055)
Total loan repayments ..............................    (31,242)        (23,816)        (23,852)
(Decrease) increase in other items, net ............       (627)           (410)            246
                                                       --------        --------        --------
         Net increase (decrease) ...................   $ 14,372        $    (92)       $   (347)
                                                       ========        ========        ========
</TABLE>


                                       14
<PAGE>

      The following table shows the purchase,  sale and repayment  activities of
the Bank's mortgage-backed and related securities for the periods indicated.

<TABLE>
<CAPTION>
                                                                     Year Ended June 30,
                                                          -----------------------------------------
                                                            2004              2003            2002
                                                          -------           -------         -------
                                                                     (Dollars in Thousands)
<S>                                                       <C>               <C>             <C>
Purchases:
  Mortgage-backed and related securities .............    $ 2,161           $ 6,387         $ 4,855
  Collateralized Mortgage Obligation .................         --                --              --
                                                          -------           -------         -------
        Total ........................................      2,161             6,387           4,855
                                                          =======           =======         =======

Sales:
  Mortgage-backed and related securities .............     (1,240)               --            (430)
  Collateralized Mortgage Obligation .................         --                --          (2,970)
                                                          -------           -------         -------
        Total ........................................     (1,240)               --          (3,400)
                                                          =======           =======         =======

Repayments:
  Mortgage-backed and related securities .............     (4,066)           (3,874)         (3,284)
  Collateralized Mortgage Obligation .................         --              (460)           (605)
  Net (Amortization)/Accretion MBS and CMOs ..........       (113)              (72)            (60)
  (Decrease)/increase in other items, net ............       (380)               52            (117)
                                                          -------           -------         -------
        Net (decrease)/increase ......................    $(3,638)          $ 2,033         $(2,611)
                                                          =======           =======         =======
</TABLE>

Asset Quality

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

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


                                       15
<PAGE>

      The following table sets forth the Bank's loan  delinquencies  by type, by
amount and by  percentage  of category at June 30, 2004.  The amounts  presented
represent the total remaining  principal balances of the loans,  rather than the
actual payment amounts which are overdue.

<TABLE>
<CAPTION>
                                                                 Loans Delinquent For:
                          ----------------------------------------------------------------------------------------------------------
                                 30-59 Days                 60-89 Days              90 Days and Over                Total
                          ----------------------------------------------------------------------------------------------------------
                                            Percent                    Percent                    Percent                    Percent
                                            of Loan                    of Loan                    of Loan                    of Loan
                          Number   Amount  Category  Number   Amount  Category  Number   Amount  Category  Number   Amount  Category
                          ----------------------------------------------------------------------------------------------------------
                                                                   (Dollars in Thousands)
<S>                          <C>   <C>        <C>        <C>  <C>         <C>       <C>   <C>       <C>       <C>   <C>       <C>
Real Estate:
One-to-four family ......    21    $1,159     3.2%        8   $  353      1.0%      35    $1,447    3.9%       64   $2,959     8.1%
Multi-family ............    --        --      --        --       --       --       --        --     --        --       --      --
Commercial real estate ..     2       614     9.9         2      227      3.6        2        82    1.3         6      923    14.8
Consumer ................    24       155     2.0        21      261      3.3       32       251    3.2        77      667     8.5
Commercial business .....    12     1,195     5.5        11      544      2.5       18       843    3.8        41    2,582    11.8
                          -----    ------            ------   ------            ------    ------           ------   ------
   Total ................    59    $3,123     3.9%       42   $1,385      1.8%      87    $2,623    3.3%      188   $7,131     9.0%
                          =====    ======            ======   ======            ======    ======           ======   ======
</TABLE>


                                       16
<PAGE>

      Non-Performing  Assets.  The  table  below  sets  forth  the  amounts  and
categories  of  non-performing  assets in the Bank's loan  portfolio.  Loans are
placed on non-accrual  status when the collection of principal  and/or  interest
becomes  doubtful.  As a matter of policy,  the Bank does not  generally  accrue
interest on loans past due 90 days or more.  Foreclosed  assets  include  assets
acquired in settlement of loans.

                                                          At June 30,
                                                 -----------------------------
                                                  2004        2003       2002
                                                 ------      ------     ------
                                                    (Dollars in Thousands)
Non-accruing loans:
   One-to-four family .......................    $1,447      $1,928     $1,383
   Commercial real estate ...................        82          --         --
   Consumer .................................       251         332        252
   Commercial business ......................       843         395        282
                                                 ------      ------     ------
        Total ...............................     2,623       2,655      1,917
                                                 ------      ------     ------

Accruing loans 90 days or more:
   One-to-four family .......................        --          --         --
   Commercial ...............................        --          --         --
                                                 ------      ------     ------
        Total ...............................        --          --         --
                                                 ------      ------     ------

Foreclosed assets:
   One-to-four family .......................       147          84        206
   Commercial real estate ...................        --         260         --
   Consumer .................................        34          --          4
                                                 ------      ------     ------
        Total ...............................       181         344        210
                                                 ------      ------     ------

Total non-performing assets .................    $2,804      $2,999     $2,127
                                                 ======      ======     ======
Total as a percentage of total assets .......      2.83%       3.28%      2.41%
                                                 ======      ======     ======

      For fiscal 2004, 2003 and 2002 gross interest income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original terms  amounted to $268,000,  $291,000 and $198,000,  respectively,  of
which  $116,000,  $133,000 and $92,000,  respectively,  was included in interest
income for such period.

      At June 30, 2004, there were no non-performing  loans to a single borrower
or group of related  borrowers  in excess of $337,000.  At June 30, 2004,  there
were no  nonaccruing  loans  contained  in the  foregoing  table  which  was not
described in "Other Loans of Concern" or "Classified Assets" below.

      Classified Assets.  Federal  regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser  quality,  as  "substandard,"  "doubtful" or "loss." An asset is
considered  "substandard"  if it is  inadequately  protected  by the current net
worth and paying capacity of the obligor or of the collateral  pledged,  if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard" with the added  characteristic  that
the weaknesses  present make "collection or liquidation in full" on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."


                                       17
<PAGE>

Assets  classified as "loss" are those  considered  "uncollectible"  and of such
little value that their  continuance  as assets without the  establishment  of a
specific loss reserve is not warranted.

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

      In connection with the filing of its periodic  reports with the OTS and in
accordance with its  classification of assets policy, the Bank regularly reviews
problem loans and real estate acquired through  foreclosure to determine whether
such assets require classification in accordance with applicable regulations. On
the basis of management's  review of its assets,  at June 30, 2004, the Bank had
classified  a total of $2.6  million of its assets as  substandard,  $109,000 as
doubtful  and $68,000 as loss.  All portions of a loan which are  classified  as
loss are reserved for at a rate of 100%.

      At June 30, 2004, total classified assets comprised $2.8 million, or 24.4%
of the Bank's capital, or 2.8% of the Bank's total assets.

      Allowance for Loan Losses.  The  allowance for loan losses is  established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity.  Such evaluation,  which includes a review of all loans for which full
collectibility may not be reasonably assured, considers among other matters, the
estimated  fair  value  of  the  underlying  collateral,   economic  conditions,
historical  loan loss  experience and other factors that warrant  recognition in
providing for an adequate loan loss allowance.  Although  management believes it
uses  the  best  information  available  to  make  such  determinations,  future
adjustments  to  the  allowance  may be  necessary,  and  net  income  could  be
significantly   affected,   if  circumstances   differ  substantially  from  the
assumptions  used in making the initial  determinations.  At June 30, 2004,  the
Bank had an allowance  for loan losses of $697,000,  or  approximately  0.88% of
total loans. See  "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  -- Results of  Operations -- Provision for Losses on
Loans" in the Annual Report.


                                       18
<PAGE>

      The  following  table sets forth an analysis of the Bank's  allowance  for
losses on loans.

<TABLE>
<CAPTION>
                                                                           Year Ended June 30,
                                                                      -----------------------------
                                                                       2004        2003        2002
                                                                      -----       -----       -----
                                                                          (Dollars in Thousands)
<S>                                                                   <C>         <C>         <C>
Balance at beginning of period .....................................  $ 556       $ 537       $ 369

Charge-offs:
   One-to-four family ..............................................     --         (34)       (108)
   Commercial real estate ..........................................     --          --          --
   Commercial business .............................................    (86)        (66)         (2)
   Consumer ........................................................    (92)       (123)        (55)
                                                                      -----       -----       -----
      Total charge-offs ............................................   (178)       (223)       (165)
                                                                      -----       -----       -----

Recoveries:
   One-to-four family ..............................................     --           1          --
   Commercial Business .............................................     15          --          --
   Consumer ........................................................      4           5           1
                                                                      -----       -----       -----
      Total recoveries .............................................     19           6           1
                                                                      -----       -----       -----

Net charge-offs ....................................................   (159)       (217)       (164)
Provisions charged to operations ...................................    300         236         332
                                                                      -----       -----       -----
Balance at end of period ...........................................  $ 697       $ 556       $ 537
                                                                      =====       =====       =====

Ratio of net charge-offs during the period to average loans
outstanding during the period ......................................    .22%        .33%        .25%
</TABLE>

      During fiscal 2004, 2003 and 2002, management recorded provisions for loan
losses of $300,000, $236,000 and $332,000,  respectively.  These provisions were
primarily the result of  charge-offs  on loans and  foreclosed  assets  incurred
during the periods, as well as a result of management's assessment of additional
credit risk  associated  with the  increased  level of the Bank's  consumer  and
commercial business portfolios during such periods.


                                       19
<PAGE>

      The  distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:

<TABLE>
<CAPTION>
                                                                     At June 30,
                                   ---------------------------------------------------------------------------------
                                           2004                          2003                          2002
                                   -----------------------       ---------------------         ---------------------
                                                Percent of                     Percent                       Percent
                                                 Loans in                     of Loans                      of Loans
                                                   Each                        in Each                       in Each
                                                 Category                     Category                      Category
                                                 to Total                     to Total                      to Total
                                   Amount         Loans          Amount         Loans          Amount         Loans
                                   ------       ----------       ------       --------         ------       --------
                                                                (Dollars in Thousands)
<S>                                 <C>            <C>            <C>            <C>            <C>            <C>
One-to-four family ............     $ 117          45.7%          $ 122          53.3%          $ 100          58.7%
Multi-family ..................         1            .5               2           1.2               3           2.1
Commercial real estate ........        32           7.8              29          10.9              22          10.7
Residential construction ......        18           8.9               7           3.6               4           2.2
Consumer ......................       164           9.8             183          10.7             170          10.5
Commercial business ...........       215          27.3             160          20.3             168          15.8
Unallocated ...................       150            --              53            --              70            --
                                    -----         -----           -----         -----           -----         -----
   Total ......................     $ 697         100.0%          $ 556         100.0%          $ 537         100.0%
                                    =====         =====           =====         =====           =====         =====
</TABLE>

Investment Activities

      Horizon Federal must maintain investments that qualify as liquid assets in
order  to meet  the  safety  and  soundness  standards  under  OTS  regulations.
Liquidity may increase or decrease  depending upon the availability of funds and
comparative   yields  on  investments  in  relation  to  the  return  on  loans.
Historically,  the Bank has maintained liquid assets at levels above the minimum
requirements  previously  imposed  by OTS  regulations  and at  levels  believed
adequate to meet the requirements of normal operations,  including repayments of
maturing  debt  and  potential  deposit  outflows.  Cash  flow  projections  are
regularly  reviewed and updated to assure that adequate liquidity is maintained.
At June 30, 2004, the Bank's  liquidity  ratio (liquid assets as a percentage of
net  withdrawable  savings  deposits  and  current  borrowings)  was  5.1%.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" in the Annual Report.

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

      Generally,  the investment policy of the Bank, as established by the Board
of Directors,  is to invest funds among various  categories of  investments  and
maturities  based upon the Bank's liquidity  needs,  asset/liability  management
policies, investment quality,  marketability and performance objectives. Subject
to the Board's  direction,  the Investment  Committee  meets at least monthly to
review the Bank's investments and objectives for its investment  portfolio.  The
Bank's investment policy has established methods and strategies for each type of
security. It is


                                       20
<PAGE>

the Bank's  general  policy to  purchase  investment  securities  which are U.S.
government  securities or federal  agency  obligations  or other issues that are
rated investment grade.

      The Bank has a portfolio of mortgage-backed and related securities and has
utilized such investments to complement its mortgage lending activities. At June
30,  2004,  the Bank's  mortgage-backed  and  related  securities  totaled  $7.9
million, or 8.0% of total assets. For information regarding market values of the
Bank's mortgage-backed and related securities portfolio, see Note 2 of the Notes
to Consolidated Financial Statements in the Annual Report.

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

      OTS  guidelines  regarding  investment  portfolio  policy  and  accounting
require insured  institutions to categorize  securities and certain other assets
as held for  "investment,"  "sale," or "trading."  At June 30, 2004,  all of the
Bank's  investment,  mortgage-backed  and related  securities were classified as
available-for-sale and carried at fair value.


                                       21
<PAGE>

      The following table sets forth the composition of the Bank's  portfolio of
investment and mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                                         At June 30,
                                                               --------------------------------------------------------------
                                                                       2004                  2003                  2002
                                                               --------------------------------------------------------------
                                                               Carrying    % of     Carrying      % of     Carrying     % of
                                                                 Value     Total      Value       Total      Value      Total
                                                               --------------------------------------------------------------
                                                                                    (Dollars in Thousands)
<S>                                                            <C>          <C>      <C>           <C>      <C>          <C>
Investment Securities:
   U.S. government securities .............................    $    --         --%   $    --          --%   $    --         --%
   Federal agency obligations .............................        495        7.9         --          --         --         --
   Small business administration loans ....................        364        5.8        623         6.8        667        8.9
   Equity securities (1) ..................................      2,178       34.7      2,406        26.2      1,908       25.6
   Corporate Bonds ........................................      1,551       24.7      2,603        28.3         --         --
                                                               -------    -------    -------     -------    -------    -------
      Subtotal ............................................      4,588       73.1      5,632        61.3      2,575       34.5
   FHLB stock .............................................        464        7.4        509         5.5        509        6.8
                                                               -------    -------    -------     -------    -------    -------
      Total investment securities and FHLB stock ..........      5,052       80.5      6,141        66.8      3,084       41.3
Other Interest-Earning Assets:
   Interest-bearing deposits with banks ...................      1,224       19.5      3,049        33.2      4,374       58.7
                                                               -------    -------    -------     -------    -------    -------
      Total ...............................................    $ 6,276      100.0%   $ 9,190       100.0%   $ 7,458      100.0%
                                                               =======    =======    =======     =======    =======    =======

   Average remaining life or term to repricing of
   investment securities and other interest-earning
   assets excluding FHLB stock ............................        2.90 years             1.43 years             1.20 years

Mortgage-Backed and Related Securities:
   CMOs ...................................................    $    --         --%   $    --          --%   $   462        4.9%
   FHLMC ..................................................      1,303       16.5      1,021         8.8         --         --
   FNMA ...................................................      5,097       64.5      6,737        58.4      3,077       32.3
   GNMA ...................................................      1,506       19.0      3,786        32.8      5,972       62.8
   Other ..................................................         --         --         --          --         --         --
                                                               -------    -------    -------     -------    -------    -------
      Total mortgage-backed and related securities ........    $ 7,906      100.0%   $11,544       100.0%   $ 9,511      100.0%
                                                               =======    =======    =======     =======    =======    =======
</TABLE>

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


                                       22
<PAGE>

      The  composition   and  maturities  of  the  debt  investment   securities
portfolio,  excluding  equity  securities  and FHLB stock,  are indicated in the
following table.

<TABLE>
<CAPTION>
                                                                              At June 30, 2004
                                                 --------------------------------------------------------------------------
                                                 Less Than     1 to 5       5 to 10       Over 10      Total Debt Investment
                                                  1 Year        Years        Years         Years            Securities
                                                 --------------------------------------------------------------------------
                                                 Carrying     Carrying     Carrying      Carrying       Book         Market
                                                   Value        Value        Value         Value       Value         Value
                                                 --------------------------------------------------------------------------
                                                                           (Dollars in Thousands)
<S>                                               <C>         <C>           <C>           <C>         <C>           <C>
U.S. government securities ..................     $    --     $    --       $    --       $    --     $    --       $    --
Federal agency obligations ..................          --          --            --            --          --            --
Corporate Bonds .............................         506       1,045            --            --       1,551         1,551
Small business administration loans .........          --          --            --           364         364           364
                                                  -------     -------       -------       -------     -------       -------
Total .......................................     $   506     $ 1,045       $    --       $   364     $ 1,915       $ 1,915
                                                  =======     =======       =======       =======     =======       =======
Weighted average yield ......................        6.85%       6.31%           --%         7.88%       6.75%         6.75%
</TABLE>

      The following table sets forth the contractual maturities of the Bank's
mortgage-backed and related securities at June 30, 2004; however, the expected
average life to maturity of this portfolio is generally two to ten years.

<TABLE>
<CAPTION>
                                               Due in                                  At
                        ---------------------------------------------------         June 30,
                                         1 to           5 to         10 and           2004
                        Less than     Less than      Less than        Over          Balance
                          1 Year       5 Years        10 Years        Years       Outstanding
                        ---------     ---------      ---------       ------       -----------
                                              (Dollars in Thousands)
<S>                       <C>           <C>            <C>           <C>            <C>
FHLMC .................   $   --        $   --         $   --        $1,303         $1,303
FNMA ..................       --            --            833         4,264          5,097
GNMA ..................       --            --             --         1,506          1,506
CMOs ..................       --            --             --            --             --
                          ------        ------         ------        ------         ------

Total .................   $   --        $   --         $  833        $7,073         $7,906
                          ======        ======         ======        ======         ======
</TABLE>

      At June 30, 2004, the Bank's  portfolio of investment and  mortgage-backed
securities contained two mutual funds of one issuer with an aggregate book value
of $1.4  million,  or  14.5%  of the  Bank's  stockholders'  equity,  and  three
corporate bonds of various issuers with an aggregate book value of $1.5 million,
or 16.0% of the Bank's  stockholders'  equity. There were no other securities of
any  issuer  with  an  aggregate  book  value  in  excess  of 10% of the  Bank's
stockholders' equity,  excluding securities issued by the U.S. government or its
agencies.

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


                                       23
<PAGE>

Sources of Funds

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

      Borrowings,  primarily FHLB advances,  are used to compensate for seasonal
reductions in deposits or deposit inflows at less than projected levels, and may
be used on a longer-term basis to support lending activities including purchases
of  mortgage-backed  securities.  At June 30,  2004,  the Bank  had  total  FHLB
advances of $7.96 million.

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

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


                                       24
<PAGE>

      The following  table sets forth the dollar  amount of savings  deposits in
the  various  types of  deposit  programs  offered  by the Bank for the  periods
indicated.

<TABLE>
<CAPTION>
                                                                                At June 30,
                                                ---------------------------------------------------------------------------
                                                        2004                       2003                       2002
                                                ---------------------      ---------------------      ---------------------
                                                Amount        Percent       Amount       Percent       Amount       Percent
                                                -------       -------      -------       -------      -------       -------
                                                                          (Dollars in Thousands)
<S>                                             <C>               <C>      <C>               <C>      <C>               <C>
Transactions and Savings Deposits:
----------------------------------

Commercial Demand ........................      $ 1,811           2.3%     $ 1,637           2.2%     $ 1,315           1.8%
Checking Accounts (0% to .75%) ...........       12,760          16.2        9,925          13.3        9,151          12.7
Savings Accounts (.60% to 1.35%) .........       34,150          43.4       32,720          44.0       31,754          44.2
Money Market Accounts (0%) ...............          265            .3          213            .3          362            .5
                                                -------       -------      -------       -------      -------       -------

Total Non-Certificates ...................       48,986          62.2       44,495          59.8       42,582          59.2
                                                -------       -------      -------       -------      -------       -------

Certificates:
-------------

0.00 - 3.99% .............................       23,108          29.4%      19,116          25.7%      13,197          18.3%
4.00 - 4.99% .............................        1,855           2.3        5,219           7.0        8,499          11.8
5.00 - 5.99% .............................        4,774           6.1        4,981           6.7        4,171           5.8
6.00 - 6.99% .............................           --            --          612            .8        3,485           4.8
7.00 - 7.99% .............................           --            --           --            --           20            .1
                                                -------       -------      -------       -------      -------       -------

Total Certificates .......................       29,737          37.8       29,928          40.2       29,372          40.8
                                                -------       -------      -------       -------      -------       -------
Total Deposits ...........................      $78,723         100.0%     $72,423         100.0%     $71,954         100.0%
                                                =======       =======      =======       =======      =======       =======
</TABLE>

      The  following  table shows rate and maturity  information  for the Bank's
certificates of deposit as of June 30, 2004.

<TABLE>
<CAPTION>
                                                    0.00-        3.00-       4.00-       5.00-       6.00%                Percent of
                                                    2.99%        3.99%       4.99%       5.99%      or more      Total       Total
                                                   -------      -------     -------     -------     -------     -------   ----------
                                                                                (Dollars in Thousands)
<S>                                                <C>          <C>         <C>         <C>         <C>         <C>           <C>
Certificate accounts maturing
in quarter ending:

September 30, 2004 ...........................     $ 4,466      $   502     $    84     $    27     $    --     $ 5,079       17.08%
December 31, 2004 ............................       5,045          353          --          14          --       5,412       18.20
March 31, 2005 ...............................       4,135          164          --         117          --       4,416       14.85
June 30, 2005 ................................       1,779          244           4         107          --       2,134        7.18
September 30, 2005 ...........................         724           71           6          55          --         856        2.88
December 31, 2005 ............................         989           17          84          48          --       1,138        3.83
March 31, 2006 ...............................         858           --         106          88          --       1,052        3.54
June 30, 2006 ................................         397           --         502          --          --         899        3.02
Thereafter ...................................         560        2,804       1,069       4,318          --       8,751       29.42
                                                   -------      -------     -------     -------     -------     -------     -------

Total ........................................     $18,953      $ 4,155     $ 1,855     $ 4,774     $    --     $29,737       100.0%
                                                   =======      =======     =======     =======     =======     =======     =======

Percent of total .............................       63.74%       13.97%       6.24%      16.05%       0.00%     100.0%
                                                   -------      -------     -------     -------     -------     ======
</TABLE>


                                       25
<PAGE>

      The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 2004.

<TABLE>
<CAPTION>
                                                                                     Maturity
                                                        ------------------------------------------------------------------
                                                                         Over           Over
                                                        3 Months        3 to 6        6 to 12        Over 12
                                                        or Less         Months         Months         Months        Total
                                                        --------        ------        -------        --------      -------
                                                                              (Dollars in Thousands)
<S>                                                     <C>            <C>            <C>            <C>          <C>
Certificates of deposit of less than
$100,000 ........................................        $3,929         $4,397         $5,942         $11,460      $25,728

Certificates of deposit of
$100,000 or more ................................           700          1,015            608           1,236        3,559

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

Total certificates of deposit ...................        $5,079         $5,412         $6,550         $12,696      $29,737
                                                         ======         ======         ======         =======      =======
</TABLE>

----------

(1)   Deposits from governmental and other public entities.

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

      Horizon  Federal may obtain  advances from the FHLB of Des Moines upon the
security  of its  capital  stock in the FHLB of Des  Moines  and  certain of its
mortgage loans.  Such advances may be made pursuant to several  different credit
programs, each of which has its own interest rate and range of maturities.

      The following table sets forth the maximum  month-end  balance and average
balance of FHLB advances.

                                                   Year Ended June 30,
                                        ---------------------------------------
                                         2004             2003             2002
                                        ------           ------          ------
                                                 (Dollars in Thousands)

    Maximum Balance:
    ----------------
        FHLB advances ..............    $7,958           $5,568          $8,591

    Average Balance:
    ----------------
        FHLB advances ..............    $6,410           $5,556          $6,747


                                       26
<PAGE>

      The following  table sets forth certain  information as to the Bank's FHLB
advances  at the dates  indicated.  For  additional  information  on the  Bank's
advances,  see Note 9 of the Notes to Consolidated  Financial  Statements in the
Annual Report.

                                                      At June 30,
                                        ---------------------------------------
                                           2004           2003           2002
                                        ---------      ---------      ---------
                                                (Dollars in Thousands)

     FHLB advances ..................   $   7,958      $   5,545      $   5,571
                                        =========      =========      =========

     Weighted average interest
     rate of FHLB advances ..........        4.05%          5.21%          5.21%

Subsidiary Activities

      As a federally chartered savings bank, Horizon Federal is permitted by OTS
regulations to invest up to 2% of its assets,  or $1.9 million at June 30, 2004,
in the stock of, or loans to, service corporation subsidiaries. As of such date,
the net book value of Horizon  Federal's  investment in its service  corporation
was approximately  $114,000.  Horizon Federal may invest an additional 1% of its
assets  in  service  corporations  where  such  additional  funds  are  used for
inner-city or community  development purposes and up to 50% of its total capital
in conforming  loans to service  corporations  in which it owns more than 10% of
the capital stock. In addition to investments in service  corporations,  federal
associations   are  permitted  to  invest  an  unlimited   amount  in  operating
subsidiaries  engaged  solely in activities in which a federal  association  may
engage.

      Horizon Federal has one service corporation,  Horizon Investment Services,
Inc.  ("HISI"),  an Iowa  corporation,  located in Oskaloosa,  Iowa. HISI, which
changed its  corporate  name in August 1995 from SEI  Service  Corporation,  was
organized by the Bank in 1983 in order to offer a variety of investment products
to customers of Horizon  Federal.  For the fiscal year ended June 30, 2004, HISI
had a net income of $12,800.

Regulation

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


                                       27
<PAGE>

      The  Financial  Services  Modernization  Act. On November  12,  1999,  the
Gramm-Leach-Bliley  Financial  Services  Modernization  Act of 1999 ("GLBA") was
signed into law. The purpose of this  legislation was to modernize the financial
services   industry  by  establishing  a   comprehensive   framework  to  permit
affiliations among commercial banks,  insurance companies,  securities firms and
other financial service providers. Generally, the Act:

      (a)   repealed the historical restrictions and eliminates many federal and
            state law barriers to affiliations  among banks,  securities  firms,
            insurance companies and other financial service providers;

      (b)   provided a uniform  framework for the  functional  regulation of the
            activities  of  banks,   savings   institutions  and  their  holding
            companies;

      (c)   broadened the  activities  that may be conducted by national  banks,
            banking  subsidiaries of bank holding  companies and their financial
            subsidiaries;

      (d)   provided  an  enhanced  framework  for  protecting  the  privacy  of
            consumer information; and

      (e)   addressed a variety of other legal and regulatory  issues  affecting
            day-to-day   operations   and  long-term   activities  of  financial
            institutions.

      The GLBA also imposes  certain  obligations on financial  institutions  to
develop privacy policies,  restrict the sharing of nonpublic  customer data with
nonaffiliated  parties at the customer's request,  and establish  procedures and
practices to protect and secure  customer data.  These privacy  provisions  were
implemented by regulations that were effective on November 12, 2000.  Compliance
with the privacy provisions was required by July 1, 2001.

      USA Patriot Act of 2001. In October 2001,  the USA Patriot Act of 2001 was
enacted in  response  to the  terrorist  attacks in New York,  Pennsylvania  and
Washington,  D.C.,  which  occurred on September  11,  2001.  The Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence  communities'
abilities to work  cohesively  to combat  terrorism on a variety of fronts.  The
potential  impact of the Patriot Act on financial  institutions  of all kinds is
significant  and wide  ranging.  The Patriot Act  contains  sweeping  anti-money
laundering  and financial  transparency  laws and imposes  various  regulations,
including standards for verifying client  identification at account opening, and
rules to promote  cooperation among financial  institutions,  regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.

      Among  other  requirements,  Title III of the USA  Patriot Act imposes the
following requirements:

o     All financial  institutions must establish anti-money  laundering programs
      that include (i) internal policies, procedures and controls, (ii) specific
      designation of an anti-money laundering compliance officer,  (iii) ongoing
      employee  training programs and (iv) an independent audit function to test
      the anti-money laundering program.


                                       28
<PAGE>

o     Financial  institutions that establish,  maintain,  administer,  or manage
      private banking  accounts or  correspondent  accounts in the United States
      for  non-United  States  persons or their  representatives  must establish
      appropriate,  specific,  and,  where  necessary,  enhanced  due  diligence
      policies,  procedures,  and  controls  designed to detect and report money
      laundering.

o     Financial  institutions  are prohibited  from  establishing,  maintaining,
      administering or managing  correspondent  accounts for foreign shell banks
      that do not have a physical  presence in any country,  and will be subject
      to certain  record  keeping  obligations  with  respect  to  correspondent
      accounts of foreign banks.

o     Bank regulators are directed to consider a holding company's effectiveness
      in combating money  laundering when ruling on Federal Reserve Act and Bank
      Merger Act applications.

The  Company's  policies  and  procedures  have  been  updated  to  reflect  the
requirements of the USA Patriot Act.

      Sarbanes-Oxley  Act of 2002. On July 30, 2002,  President Bush signed into
law the Sarbanes-Oxley Act of 2002, or the SOA. The SOA is the most far-reaching
U.S. securities legislation enacted in many years, and includes many substantive
and disclosure-based  requirements.  The stated goals of the SOA are to increase
corporate  responsibility,  to provide for enhanced penalties for accounting and
auditing  improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate  disclosures pursuant to the
securities  laws.  The SOA  generally  applies to all  companies,  both U.S. and
non-U.S., that file or are required to file periodic reports with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange
Act").

      The SOA creates an independent  auditing-oversight board under the SEC. It
also  increases  penalties  for  corporate  wrongdoers,  forces  faster and more
extensive  financial  disclosure,  and creates avenues of recourse for aggrieved
shareholders.  The SOA also contains  separate  provisions  that require  signed
certifications to be made by the chief executive officer and the chief financial
officer of all public companies,  and provides criminal  penalties of up to $5.0
million  and  imprisonment  of up to 20  years  for an  officer  that  willfully
provides a certification knowing it to be untrue.

      The SOA also addresses functions and  responsibilities of audit committees
of public  companies.  Each audit  committee  is  directly  responsible  for the
appointment,  compensation  and oversight of the work of the  Company's  outside
auditors,  and the auditors must report  directly to the audit  committee.  Each
audit committee member must be independent, which under the Act means that he or
she  cannot  (other  than  in his or  her  capacity  as a  member  of the  audit
committee,  the board or any  other  board  committee)  accept  any  consulting,
advisory or other  compensatory  fees from the Company or be affiliated with the
Company  or  any  of its  subsidiaries.  Each  audit  committee  must  establish
procedures to receive and respond to any complaints  and concerns  regarding the
Company's accounting,  accounting controls or auditing matters. These procedures
would include enabling the Company's  employees to transmit  concerns  regarding
questionable accounting or auditing matters by confidential, anonymous


                                       29
<PAGE>

submission.  In recognition of the audit committee's  independent  status,  each
audit committee is authorized to engage independent  counsel and other advisors.
The Company must also provide the  appropriate  funding,  as  determined  by the
audit committee, for payment of compensation to the auditors and advisors of the
audit committee.

      Federal  Regulation  of  Savings  Associations.   The  OTS  has  extensive
authority over the operations of savings banks, such as Horizon Federal. As part
of this  authority,  the Bank is required to file periodic  reports with the OTS
and is  subject  to  periodic  examinations  by the OTS and the  FDIC.  The last
regular OTS and FDIC  examinations of the Bank were as of June 30, 2003 and June
30, 2002,  respectively.  Under agency scheduling guidelines,  another review is
expected  June 2005.  When these  examinations  are conducted by the OTS and the
FDIC,  the  examiners  may  require  the Bank to provide  for higher  general or
specific  loan loss  reserves  and take other  corrective  actions.  All savings
associations  are subject to a  semi-annual  assessment,  based upon the savings
association's  total assets,  to fund the  operations of the OTS. The Bank's OTS
assessment for fiscal 2004 was $29,600.

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

      In addition,  the investment,  lending and branching authority of the Bank
is  prescribed  by  federal  law,  and it is  prohibited  from  engaging  in any
activities not permitted by such laws.  For example,  the  permissible  level of
investment   by  federal   associations,   subject   to  safety  and   soundness
restrictions,  (1) in loans  secured by  non-residential  real  property may not
exceed  400% of total  capital,  (2) in  commercial  loans may not exceed 20% of
assets,  provided  that  amounts  in excess  of 10% of assets  may only be small
business loans,  (3) in loans related to leasing of tangible  personal  property
may not  exceed  10% of  assets,  and (4) in  loans  for  personal,  family  and
household  purposes,  when combined  with  commercial  paper and corporate  debt
securities,  may not exceed 35% of assets.  The Bank is in  compliance  with the
noted restrictions.  Federal savings  associations are also generally authorized
to branch nationwide. Federal associations such as Horizon Federal may designate
under which  investment  authority  (or basket) it made a loan or  investment if
that loan or investment is authorized under different sections of the law.

      The Bank's general permissible lending limit for loans-to-one  borrower is
equal to the greater of $1.0  million or 15% of  unimpaired  capital and surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 2004, the Bank's lending limit under this restriction was approximately
$1.5 million.

      The OTS,  as well as the  other  federal  banking  agencies,  has  adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and


                                       30
<PAGE>

documentation,  asset quality,  earnings standards,  internal controls and audit
systems,  interest  rate risk  exposure  and  compensation  and  other  employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action.

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

      The FDIC's deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period. As
of June 30, 2004, the Bank was classified as a well-capitalized institution.

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

      Since  January 1, 1997,  the  premium  schedule  for BIF and SAIF  insured
institutions  has  ranged  from  0  to  27  basis  points.  However,  SAIF-  and
BIF-insured  institutions are required to pay a Financing Corporation assessment
in order to fund the interest on bonds issued to resolve thrift  failures in the
1980s equal to approximately 1.5 basis points for each $100 in domestic deposits
annually.  These  assessments,  which may be revised based upon the level of BIF
and SAIF deposits, will continue until the bonds mature.

      Under the Federal Deposit  Insurance Act ("FDIA"),  the FDIC may terminate
deposit  insurance upon a finding that the  institution has engaged in unsafe or
unsound practices,  is in an unsafe or unsound condition to continue  operations
or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC or the OTS.  Management  of the Bank


                                       31
<PAGE>

does not  know of any  practice,  condition  or  violation  that  might  lead to
termination of deposit insurance.

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

      The  capital  regulations  require  tangible  capital  of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the requirement.  At June 30, 2004, the Bank did not have any intangible  assets
or purchased mortgage servicing rights.

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

      At June 30, 2004, the Bank had tangible  capital of $9.4 million,  or 9.6%
of adjusted total assets,  which is approximately $7.9 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.

      The capital  standards also  effectively  require core capital equal to at
least 3% to 4% of adjusted  total  assets.  Core capital  generally  consists of
tangible capital plus certain intangible  assets,  including a limited amount of
purchased credit card receivables.  At June 30, 2004, the Bank had no intangible
assets which were subject to these  tests.  At June 30, 2004,  the Bank had core
capital equal to $9.4 million,  or 9.6% of adjusted total assets,  which is $5.5
million above the minimum leverage ratio  requirement of 4% as in effect on that
date.

      The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of  non-traditional  activities.  At June 30, 2004, the Bank had no
capital  instruments  that  qualify as  supplementary  capital,  and $654,000 of


                                       32
<PAGE>

general  loss  reserves,  which was less  than  1.25% of  risk-weighted  assets.
Certain  exclusions  from  capital  and assets are  required  to be made for the
purpose of calculating  total capital.  Horizon  Federal had no exclusions  from
capital and assets at June 30, 2004. In determining the amount of  risk-weighted
assets,  all  assets,   including  certain  off-balance  sheet  items,  will  be
multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent
in the type of asset.

      On June 30, 2004,  the Bank had total capital of $10.1 million  (including
$9.4 million in core capital and $654,000 in qualifying  supplementary  capital)
and risk-weighted  assets of $73.5 million (including $1.26 million in converted
off-balance  sheet assets);  or total capital of 13.7% of risk-weighted  assets.
This amount was $4.2 million above the 8% requirement in effect on that date.

      Prompt Corrective  Action.  The OTS and the FDIC are authorized and, under
certain  circumstances   required,  to  take  certain  actions  against  savings
associations that fail to meet their capital requirements.  The OTS is generally
required to take  action to  restrict  the  activities  of an  "undercapitalized
association"  (generally  defined  to be one  with  less  than  either a 4% core
capital  ratio,  a 4% Tier 1  risked-based  capital  ratio  or an 8%  risk-based
capital ratio). Any such association must submit a capital  restoration plan and
until such plan is approved  by the OTS may not  increase  its  assets,  acquire
another  institution,  establish a branch or engage in any new  activities,  and
generally  may not make capital  distributions.  The OTS is authorized to impose
the   additional    restrictions    that   are   applicable   to   significantly
undercapitalized  associations.  As a condition  to the  approval of the capital
restoration plan, any company controlling an  undercapitalized  association must
agree that it will  enter  into a limited  capital  maintenance  guarantee  with
respect to the institution's achievement of its capital requirements.

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

      The  imposition  by the OTS or the  FDIC of any of these  measures  on the
Company  or the Bank may have a  substantial  adverse  effect  on the  Company's
operations and profitability.

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


                                       33
<PAGE>

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

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

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

      Qualified  Thrift  Lender Test.  All savings  associations,  including the
Bank,  are  required to meet a qualified  thrift  lender  ("QTL")  test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal  Revenue  Code of 1986,  as amended  (the  "Code").  Such assets
primarily consist of residential housing related loans and investments.  At June
30,  2004,  the  Bank  met the  test  and has  always  met the  test  since  its
effectiveness.

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

      If the Bank fails the QTL test,  the Company  must obtain the  approval of
the OTS prior to continuing  after such  failure,  directly or through its other
subsidiaries,  any  business  activity  other than those  approved  for multiple
savings and loan holding companies or their  subsidiaries.  In


                                       34
<PAGE>

addition,  within one year of such  failure,  the Company must  register as, and
will become subject to, the restrictions  applicable to bank holding  companies.
The activities  authorized for a bank holding  company are more limited than are
the  activities  authorized  for a unitary or multiple  savings and loan holding
company. See "Qualified Thrift Lender Test."

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

      The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's  compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years,  the Bank may be required to devote  additional  funds for investment
and lending in its local community. The Bank was examined for CRA compliance for
June 2003 and received a rating of "outstanding."

      Activities  of  Associations  and  Their  Subsidiaries.   When  a  savings
institution  establishes  or acquires a subsidiary  or elects to conduct any new
activity  through  a  subsidiary  that the  association  controls,  the  savings
institution  must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation,  require.  Savings institutions also
must  conduct  the  activities  of  subsidiaries  in  accordance  with  existing
regulations and orders.

      The OTS may determine that the  continuation  by a savings  institution of
its ownership,  control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings institution or
is inconsistent  with sound banking  practices or with the purposes of the FDIC.
Based upon that  determination,  the FDIC or the OTS has the  authority to order
the savings institution to divest itself of control of the subsidiary.  The FDIC
also may  determine by regulation  or order that any specific  activity  poses a
serious  threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.

      Transactions  with  Affiliates.  Savings  institutions  must  comply  with
Sections 23A and 23B of the Federal  Reserve Act relative to  transactions  with
affiliates  in the  same  manner  and  to  the  same  extent  as if the  savings
institution were a Federal Reserve member Savings Bank. Generally,  transactions
between  a  savings  institution  or its  subsidiaries  and its  affiliates  are
required to be on terms as favorable to the  association  as  transactions  with
non-affiliates.  In addition, certain of these transactions, such as loans to an
affiliate,  are  restricted  to  a  percentage  of  the  association's  capital.
Affiliates  of the Bank  include the  Corporation  and any company that is under
common control with the Bank. In addition, a savings institution may not lend to
any  affiliate  engaged in  activities  not  permissible  for a savings and loan
holding  company or acquire


                                       35
<PAGE>

the  securities  of  most  affiliates.  The  OTS has  the  discretion  to  treat
subsidiaries of savings institutions as affiliates on a case-by-case basis.

      On  April  1,   2003,   the   Federal   Reserve's   Regulation   W,  which
comprehensively  amends  sections 23A and 23B of the Federal Reserve Act, became
effective.  The Federal  Reserve Act and  Regulation W are applicable to savings
institutions  such  as the  Bank.  The  Regulation  unifies  and  updates  staff
interpretations  issued over the years,  incorporates several new interpretative
proposals  (such as to clarify when  transactions  with an unrelated third party
will be attributed to an affiliate) and addresses new issues arising as a result
of the  expanded  scope of  nonbanking  activities  engaged in by banks and bank
holding companies in recent years and authorized for financial holding companies
under the Financial Services Modernization Act of 1999.

      Certain  transactions with directors,  officers or controlling persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

      Regulatory  and  Criminal  Enforcement  Provisions.  The OTS  has  primary
enforcement  responsibility  over savings  institutions and has the authority to
bring   action   against   all   "institution-affiliated   parties,"   including
stockholders,  and any attorneys,  appraisers and  accountants  who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership,   conservatorship  or  termination  of  deposit  insurance.  Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
$1.1 million per day in especially  egregious  cases. The FDIC has the authority
to recommend to the  Director of the OTS that  enforcement  action be taken with
respect to a  particular  savings  institution.  If the  Director  does not take
action, the FDIC has authority to take such action under certain  circumstances.
Federal law also establishes criminal penalties for certain violations.

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

      As a unitary  savings and loan holding  company that has been in existence
prior  to May  4,  1999,  the  Company  generally  is not  subject  to  activity
restrictions.  If the Company acquires control of another savings association as
a separate  subsidiary,  it would  become a multiple  savings  and loan  holding
company,  and the activities of the Company and any of its  subsidiaries  (other
than  the Bank or any  other  SAIF-insured  savings  association)  would  become
subject to such restrictions.

      Federal  Securities  Law. The stock of the Company is registered  with the
SEC under the Securities  Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to


                                       36
<PAGE>

the  information,  proxy  solicitation,  insider trading  restrictions and other
requirements of the SEC under the Exchange Act.

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

      Federal Reserve System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts).  At June 30, 2004,  the Bank was in  compliance  with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the OTS.

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

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

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of Des Moines. At June 30, 2004, the Bank had $464,000 in FHLB stock, which
was in compliance  with this  requirement.  For fiscal 2004 and 2003,  dividends
paid by the FHLB of Des Moines to Horizon  Federal  totaled  $9,000 and  $15,300
respectively.

      Under  federal  law,  the  FHLB  is  required  to  provide  funds  for the
resolution  of  troubled  savings  institutions  and to  contribute  to low  and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
also could have an adverse  effect on the value of FHLB stock in the future.  In
addition,  the federal agency that regulates the FHLBs has required each bank to
register its stock with the SEC,  which will increase the costs of each bank and
may have other effects that are not possible to predict at this time.


                                       37
<PAGE>

Federal and State Taxation

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

      In August 1996,  legislation  was enacted that repealed the reserve method
of accounting  (including the percentage of taxable income method which was used
in prior  years) used by many  thrifts to  calculate  their bad debt reserve for
federal income tax purposes.  Thrift  institutions  with $500 million or less in
assets may, however,  continue to use the experience  method.  As a result,  the
Bank  recaptured that portion of the reserve that exceeded the amount that could
have been taken  under the  experience  method  for  post-1987  tax  years.  The
recapture was approximately  $56,000 per year over a six-year period which began
in fiscal 1997 and ended in fiscal 2002. The  legislation  also requires  thrift
institutions  to account  for bad debts for federal  income tax  purposes on the
same basis as commercial  banks for tax years beginning after December 31, 1995.
As a result,  the Company  computes  its bad debt  deduction  on the  experience
method.

      In addition to the regular  income tax,  corporations,  including  savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of  alternative  minimum  taxable income for fiscal years before fiscal
2001 and 100% for fiscal 2001 and 2002.

      To the extent earnings  appropriated to a savings  association's  bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of June 30,  2004,  the  Bank's  Excess  for tax  purposes  totaled
approximately $1.263 million.


                                       38
<PAGE>

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

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

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

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

Effect of New Accounting Standards

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

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


                                       39
<PAGE>

      In May  2003,  the  FASB  issued  SFAS No.  150,  Accounting  for  Certain
Financial  Instruments with Characteristics of both Liabilities and Equity, SFAS
No.150  requires  issuers of financial  instruments  to classify as  liabilities
certain  freestanding  financial  instruments  that embody  obligations  for the
issuer.  SFAS No. 150 was effective for all freestanding  financial  instruments
entered into or modified  after May 31, 2003 and was otherwise  effective at the
beginning of the first interim period  beginning after June 15, 2003. On October
29, 2003,  the FASB voted to defer for an indefinite  period the  application of
the guidance in SFAS No. 150 to non-controlling interests that are classified as
equity in the financial  statements of a subsidiary but would be classified as a
liability on the parent's financial statements.  The adoption of the sections of
this Statement that have not been deferred did not have a significant  impact on
the Company's  financial  condition or results of operations.  The section noted
above that has been  deferred  indefinitely  is not  expected to have a material
impact on the Company's financial condition or results of operations.

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

Competition

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

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

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


                                       40
<PAGE>

primary market area to be  approximately  18%.  Horizon  Federal Savings Bank is
also active in Polk  County with a lending  office that has less than 1% of that
market.

Employees

      At June 30,  2004,  the Bank had a total of 37  full-time  and 6 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.

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

      Vicki  Hladik - Ms.  Hladik,  age 43,  joined  Horizon  Federal in 1995 as
Assistant  Treasurer and was promoted to Controller and Treasurer of the Bank in
2001 and  Chief  Financial  Officer  in 2002.  Ms.  Hladik  is in  charge of the
accounting department of the Bank.

      Kent R. Frankenfeld - Mr. Frankenfeld,  age 47, joined the Bank in October
1994, as Vice  President in charge of Marketing and Sales.  Mr.  Frankenfeld  is
department head for the retail division of the Bank.

      Michaela L. Barrett- Ms.  Barrett,  age 30, served Horizon Federal Savings
Bank as a loan processor  from 1994 through 2000. In 2003, Ms. Barrett  returned
as the  department  head  of the  Operations  Department  and  is in  charge  of
Technology and Compliance.

Item 2. Description of Property
        -----------------------

      The Bank  conducts its business  through three  offices,  two of which are
located in Oskaloosa, Iowa and one in Knoxville,  Iowa. The following table sets
forth  information  relating to each of the Bank's  offices as of June 30, 2004.
The total net book value of the Bank's premises and equipment  (including  land,
buildings and leasehold  improvements and furniture,  fixtures and equipment) at
June  30,  2004  was  approximately  $3.35  million.  See  Note  6 of  Notes  to
Consolidated Financial Statements in the Annual Report.

                                         Date            Total Approximate
          Location                     Acquired            Square Footage
----------------------------         ------------       ---------------------
Main Office:                             1964                  4,230
   301 First Avenue East
   Oskaloosa, Iowa

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

   1022 West Pleasant Street             1979                  4,159
   Knoxville, Iowa


                                       41
<PAGE>

      Horizon Federal believes that its current  facilities are adequate to meet
the present and  foreseeable  needs of the Bank and the Company in Oskaloosa and
Knoxville, Iowa.

      In April  2003,  the Bank  opened a mortgage  loan  origination  office in
Pleasant  Hill,  Iowa which serves Polk County and  surrounding  areas.  In late
August 2004, the Bank opened a retail banking office in Pleasant Hill, Iowa.

Item 3. Legal Proceedings
        -----------------

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

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

      No  matter  was  submitted  to a vote  of  security  holders  through  the
solicitation of proxies or otherwise during the fourth quarter of fiscal 2004.


                                       42
<PAGE>

                                     PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
        ------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------

      Page 46 of the attached 2004 Annual Report to Stockholders is incorporated
herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plan.

      The following  table  provides  information as of June 30, 2004 related to
our equity compensation plans in effect at that time.

<TABLE>
<CAPTION>
                                            Equity Compensation Plan Information
-------------------------------------------------------------------------------------------------------
      Plan Category          Number of Securities       Weighted-average        Number of securities
                              to be Issued Upon        Exercise Price of        Remaining Available
                                 Exercise of          Outstanding Options,      for Future Issuance
                             Outstanding Options,      Warrants and Rights          Under Equity
                             Warrants and Rights                                 Compensation Plans
-------------------------------------------------------------------------------------------------------
<S>                                 <C>                        <C>                       <C>
  Equity Compensation
   Plans Approved by
    Security Holders                9,060                      $5.50                     --
-------------------------------------------------------------------------------------------------------
  Equity Compensation
  Plans Not Approved
  by Security Holders                  --                         --                     --
-------------------------------------------------------------------------------------------------------
         Total                      9,060                      $5.50                     --
-------------------------------------------------------------------------------------------------------
</TABLE>

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

      Pages 4 through 16 of the attached 2004 Annual Report to Stockholders  are
incorporated herein by reference.

Item 7. Financial Statements
        --------------------

      The following  information  appears in the Company's 2004 Annual Report to
Stockholders for fiscal 2004, and is incorporated herein by reference.

<TABLE>
<CAPTION>
Annual Report Section                                           Pages in Annual Report
---------------------                                           ----------------------
<S>                                                                       <C>
Independent Auditors' Report                                              18

Consolidated Balance Sheets as of June 30, 2004 and 2003                  19

Consolidated Statements of Operations for the Years Ended                 20
June 30, 2004, 2003 and 2002

Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for Years Ended
June 30, 2004, 2003 and 2002                                              21

Consolidated Statements of Cash Flows for Years Ended
June 30, 2004, 2003 and 2002                                              22

Notes to Financial Statements                                             23
</TABLE>


                                       43
<PAGE>

      With the exception of the aforementioned information, the Company's Annual
Report to  Stockholders  for fiscal  2004,  is not deemed  filed as part of this
Annual Report on Form 10-KSB.

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

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

Item 8A. Controls and Procedures
         -----------------------

      We  carried  out  an  evaluation,  under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  of the design and operation of our disclosure  controls and
procedures.  Based on this  evaluation,  our Chief  Executive  Officer and Chief
Financial Officer  concluded that, as of June 30, 2004, our disclosure  controls
and  procedures  were  effective  to  provide  reasonable   assurance  that  the
information  we are  required to disclose in the reports we file or submit under
the  Securities  Exchange Act of 1934 is  recorded,  processed,  summarized  and
reported within the time periods specified in the SEC's rules and forms.

      Any control system, no matter how well designed and operated,  can provide
only  reasonable  (not  absolute)  assurance  that its  objectives  will be met.
Furthermore,  no evaluation of controls can provide absolute  assurance that all
control issues and instances of fraud, if any, have been detected.

Item 8B. Other Information
         -----------------

      Not applicable.

                                    PART III

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

Directors

      Information  concerning Directors of the Company is incorporated herein by
reference  from  the  definitive  proxy  statement  for the  Annual  Meeting  of
Stockholders  to be held on


                                       44
<PAGE>

October 28,  2004,  a copy of which was filed with the  Securities  and Exchange
Commission (the "SEC") on September 28, 2004.

Executive Officers

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

Compliance with Section 16(a)

      Information  concerning  compliance  with Section 16(a) of the  Securities
Exchange Act of 1934 is  incorporated  herein by reference  from the  definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on October 28,
2004, a copy of which was filed with the SEC on September 28, 2004.

Item 10. Executive Compensation
         ----------------------

      Information  concerning  executive  compensation is incorporated herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held on October 28, 2004, a copy of which was filed with the
SEC on September 28, 2004.

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          ----------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

      Information concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  Proxy
Statement for the Annual Meeting of Stockholders to be held on October 28, 2004,
a copy of which was filed with the SEC on September 28, 2004.

Item 12. Certain Relationships and Related Transactions
         ----------------------------------------------

      Information  concerning certain  relationships and related transactions is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of  Stockholders  to be held on October 28, 2004, a copy of which
was filed with the SEC on September 28, 2004.

Item 13. Exhibits and Reports on Form 8-K
         --------------------------------

      (a)   Exhibits - See Index to Exhibits.

      (b)   Reports on Form 8-K - The following is a description of the Form 8-K
            filed during the three-month period ended June 30, 2004:

            On April  29,  2004,  current  report on Form 8-K was  furnished  to
      announce the Company's earnings for the three month and nine month periods
      ended March 31, 2004:


                                       45
<PAGE>

            On June 4, 2004, current report on Form-8K was furnished to announce
      the Company's approval of a stock repurchase plan.

Item 14. Principal Accountant Fees and Services
         --------------------------------------

            Information  concerning  principal  accountant  fees and services is
incorporated  herein by reference  from the definitive  Proxy  Statement for the
Annual Meeting of  Stockholders  to be held on October 28, 2004, a copy of which
was filed with the SEC on September 28, 2004.


                                       46
<PAGE>

                                   SIGNATURES

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

                                             HORIZON FINANCIAL SERVICES
                                             CORPORATION

Date: September 28 , 2004                By: /s/ Robert W. DeCook
      -------------------                    --------------------------------
                                             Robert W. DeCook, President and
                                             Chief Executive Officer
                                             (Duly Authorized Representative)

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


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

Date: September 28, 2004                       Date: September 28, 2004
      ------------------                             ------------------


      /s/ Gary L. Rozenboom                       /s/ Michael F. Cooney, III
-----------------------------------------      ---------------------------------
Gary L. Rozenboom, Director                    Michael F. Cooney, III, Director

Date: September 28, 2004                       Date: September 28, 2004
      ------------------                             ------------------

     /s/ Vicki Hladik
---------------------------
Vicki Hladik, Treasurer and
Chief Financial Officer

Date: September 28, 2004
      ------------------


                                       47
<PAGE>

                                Index to Exhibits

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

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

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

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

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

    10.2    1994  Stock  Option and  Incentive  Plan,  filed as Exhibit  10.3 to
            Registrant's  Annual Report on Form 10-KSB for the fiscal year ended
            June  30,  1994  (File  No.  0-24036),  is  incorporated  herein  by
            reference.

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

    13      Annual Report to Stockholders

    21      Subsidiaries of the Registrant

    23      Consent of KPMG LLP

    31      Certification  of  Robert  W.  DeCook  pursuant  to  Section  302 of
            Sarbanes-Oxley Act of 2002.

    31.1    Certification   of  Vicki   Hladik   pursuant   to  Section  302  of
            Sarbanes-Oxley Act of 2002.

    32      Certifications  of Robert W.  DeCook  pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002.

    32.1    Certifications  of  Vicki  Hladik  pursuant  to  Section  906 of the
            Sarbanes-Oxley Act of 2002.


                                       48