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

                                   FORM 10-QSB

(Mark One)

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

         For the quarterly period ended September 30, 1999

                                       or

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

         For the transition period from ________________ to _________________

                        Commission File Number: 0-24036

                     Horizon Financial Services Corporation
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                                    Delaware
--------------------------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                                   42-1419757
--------------------------------------------------------------------------------
                      (I.R.S. Employer Identification No.)

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

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


--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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. [X] YES [ ] NO
<PAGE>

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

             Common Stock                                873,062
             ------------                          -----------------------
                 Class                             Shares Outstanding
                                                   as of November 15, 1999

Transitional Small Business Disclosure Format (check one):
                           Yes    [  ]:  No     [ X ]

<PAGE>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                      INDEX


Part I.  Financial Information                                              Page

          Item 1.  Financial Statements (Unaudited)

          Consolidated  Balance  Sheets at September  30, 1999 and June 30,
          1999.                                                               1

          Consolidated  Statements of Operations for the three months ended
          September 30, 1999 and 1998.                                        2

          Consolidated  Statements  of  Comprehensive  Income for the three
          months ended September 30, 1999 and 1998.                           3

          Consolidated  Statements of Cash Flows for the three months ended
          September 30, 1999 and 1998.                                        4

          Notes to Consolidated Financial Statements                          5

          Item  2.  Management's   Discussion  and  Analysis  of  Financial
                   Condition and Results of Operations                        7


Part II.  Other Information                                                  13

          Signatures                                                         14

          Index of Exhibits                                                  15

          Financial Data Schedule                                            16

<PAGE>
                                   PART I

ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                   HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                 Consolidated Balance Sheets

                                                            September 30,        June 30,
Assets                                                           1999              1999
------                                                      ------------       ------------
                                                                     (Unaudited)
<S>                                                          <C>               <C>
Cash and cash equivalents ..............................     $  9,415,129      $  7,917,020
Securities available-for-sale ..........................       14,017,593        17,096,985
Loans receivable, net ..................................       56,787,882        56,066,399
Real estate ............................................          270,057           270,779
Stock in Federal Home Loan Bank, at cost ...............        1,202,500         1,202,500
Office property and equipment, net .....................        1,058,841         1,089,053
Accrued interest receivable ............................          512,333           522,121
Deferred tax asset .....................................          207,933           254,000
Income tax receivable ..................................          522,699           522,699
Prepaid expenses and other assets ......................           81,443            81,646
                                                             ------------      ------------

     Total assets ......................................     $ 84,076,410      $ 85,023,202
                                                             ------------      ============

Liabilities and Stockholders' Equity
------------------------------------
Deposits ...............................................     $ 58,856,858      $ 59,576,232
Advances from Federal Home Loan Bank ...................       16,583,679        16,606,176
Advance payments by borrowers for taxes and insurance ..           80,014           399,830
Accrued income taxes: ..................................            3,500             - - -
Accrued expenses and other liabilities .................          423,553           380,617
                                                             ------------      ------------

     Total liabilities .................................       75,947,604        76,962,855
                                                             ------------      ------------
Stockholders' equity
--------------------
Preferred stock, $.01 par value, authorized 250,000
     shares, none issued ...............................             --                --
Common stock, $.01 par value, 1,500,000 shares
     authorized, issued and outstanding 1,046,198 shares           10,462            10,462
Additional paid-in capital .............................        5,005,961         4,996,761
Retained earnings, substantially restricted ............        4,771,340         4,804,455
Treasury stock, at cost ................................       (1,229,571)       (1,229,571)
Unearned employee stock ownership plan shares ..........          (50,605)          (65,503)
Unrealized losses on securities available for sale .....         (378,781)         (456,257)
                                                             ------------      ------------

     Total stockholders' equity ........................        8,128,806         8,060,347
                                                             ------------      ------------

Total liabilities and stockholders' equity .............     $ 84,076,410      $ 85,023,202
                                                             ============      ============
</TABLE>
See Notes to Consolidated Financial Statements

                                       -1-
<PAGE>
<TABLE>
<CAPTION>
             HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                      Consolidated Statements of Operations

                                                                     Three Months
                                                                  Ended September 30
                                                                1999             1998
                                                            -----------      -----------
Interest income:                                                    (Unaudited)
<S>                                                         <C>              <C>
  Loans ...............................................     $ 1,179,980      $ 1,191,002
  Investment securities available-for-sale ............         272,065          381,671
  Other investment income .............................          96,606           78,489
                                                            -----------      -----------

Total interest income .................................       1,548,651        1,651.162
                                                            -----------      -----------

Interest expense:
  Deposits ............................................         647,095          690,853
  Advance from Federal Home Loan Bank .................         215,023          269,884
                                                            -----------      -----------

Total interest expense ................................         862,118          960,737
                                                            -----------      -----------

Net interest income ...................................         686,533          690,425

Provision for losses on loans .........................          24,000           24,000
                                                            -----------      -----------


Net interest income after provision for losses on loans         662,533          666,425
                                                            -----------      -----------
Noninterest income:
  Fees, commissions and service charges ...............         118,624          119,789
  Loss on securities, net .............................        (233,306)      (1,307,650)
  Other ...............................................             ---            8,364
                                                            -----------      -----------

Total noninterest income ..............................        (114,682)      (1,179,497)
                                                            -----------      -----------

Noninterest expense:
  Compensation, payroll taxes and employee benefits ...         289,648          304,861
  Advertising .........................................          27,778           14,583
  Office property and equipment .......................          79,406           76,225
  Federal insurance premiums and special assessments ..          12,629            9,099
  Data processing services ............................          38,876           28,982
  Other real estate expense, net ......................           2,559             (537)
  Other ...............................................          87,710           68,276
                                                            -----------      -----------

Total noninterest expense .............................         538,606          501,489
                                                            -----------      -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                         <C>              <C>
Earnings (loss) before taxes on income ................           9,245       (1,014,561)

Taxes on income (benefit) .............................           3,500         (373,075)
                                                            -----------      -----------

Net earnings (loss) ...................................     $     5,745      $  (641,486)
                                                            ===========      ===========
  Earnings (loss) per common share -
     Basic ............................................     $      0.01      ($     0.75)
     Diluted ..........................................     $      0.01      ($     0.75)



</TABLE>
                 See Notes to Consolidated Financial Statements

                                       -2-
<PAGE>
<TABLE>
<CAPTION>
                    HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                        Consolidated Statements of Comprehensive Income

                                                                             Three Months
                                                                          Ended September 30
                                                                         1999           1998
                                                                      ---------      ---------
                                                                             (Unaudited)
<S>                                                                   <C>            <C>
Net income (loss) ...............................................     $   5,745      $(641,486)

Other Comprehensive Income:
      Unrealized gains (losses) on securities available for sale:
          Unrealized holding gains (losses) arising
            during the period, net of tax .......................      (116,643)        35,216
      Less: reclassification adjustment for net losses
            included in net income, net of tax ..................       194,119        631,767
                                                                      ---------      ---------

Other comprehensive income, net of tax ..........................        77,476        666,983
                                                                      ---------      ---------


Comprehensive income ............................................     $  83,221      $  25,497
                                                                      ---------      ---------
</TABLE>

See Notes to Consolidated Financial Statements

                                              -3-

<PAGE>
<TABLE>
<CAPTION>
                         HORIZON FINANCIAL SERVICES CORPORATION and SUBSIDIARIES
                                  Consolidated Statements of Cash Flows
                                                                                  Three months ended
                                                                                    September 30,
                                                                               1999              1998
                                                                            -----------      -----------
Cash flows from operating activities:                                               (Unaudited)
<S>                                                                         <C>                 <C>
Net earnings ..........................................................     $     5,745         (641,486)
Adjustments to reconcile net earnings to net cash provided by operating
activities:
  Depreciation ........................................................          30,923           26,503
  Amortization of fees, premiums and accretion of discounts, net ......         (35,003)           1,118
  Provision for losses on loans and real estate .......................          24,000           24,000
  Loans originated for sale ...........................................        (735,220)      (2,033,325)
  Proceeds on sales of loans ..........................................         723,520        2,258,625
  Loss on sale of securities ..........................................         233,306           36,650
  Gain on sale of fixed assets ........................................             ---           (8,364)
  Decrease (increase) in accrued interest receivable ..................           9,788          (11,268)
  Amortization of stock compensation plans ............................          14,898           25,156
  Other, net ..........................................................          56,561         (493,094)
                                                                            -----------      -----------

Net cash provided by (used in) operating activities ...................         328,518         (815,485)
                                                                            -----------      -----------

Cash flows from investing activities:
  Principal collected on securities available for sale ................         425,656        2,478,849
  Proceeds from sale of securities available for sale .................       3,920,325          454,463
  Purchase of securities available for sale ...........................      (1,341,349)        (379,387)
  Loans to customers, net .............................................        (733,783)         611,200
  Proceeds from sale of fixed asset ...................................           - - -            9,844
  Purchase of office property and equipment, net ......................            (711)         (81,586)
                                                                            -----------      -----------

Net cash provided by investing activities .............................       2,270,138        3,093,383
                                                                            -----------      -----------

Cash flows from financing activities:
  Decrease in customer deposit accounts, net ..........................        (719,374)      (3,034,610)
  Decrease advance payments by borrowers for taxes and insurance ......        (319,816)        (318,858)
  Proceeds from advances from FHLB ....................................           - - -        3,450,000
  Principal payments on advances from FHLB ............................         (22,497)      (3,016,431)
  Payment of dividends ................................................         (38,860)         (38,545)
                                                                            -----------      -----------

Net cash  used in financing activities ................................      (1,100,547)      (2,958,444)
                                                                            -----------      -----------

Net increase (decrease) in cash and cash equivalents ..................       1,498,109         (680,546)
Cash and cash equivalents at beginning of year ........................       7,917,020        6,366,619
                                                                            -----------      -----------
Cash and cash equivalents at end of year ..............................     $ 9,415,129      $ 5,686,073
                                                                            ===========      ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                         <C>                 <C>
Supplemental disclosures of cash flow information:
  Cash paid for interest ..............................................     $   770,305      $   862,747
  Cash paid for taxes .................................................             ---          204,347
                                                                            ===========      ===========


To mark assets available for sale to fair value:
  Change in fair value ................................................     $  (123,543)     $(1,057,549)
  Less deferred taxes .................................................          46,067          390,566
                                                                            -----------      -----------
  Change in valuation allowance .......................................     $    77,476      $   666,983
                                                                            ===========      ===========
</TABLE>

See Notes to Consolidated Financial Statements

                                       -4-
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     HORIZON FINANCIAL SERVICES CORPORATION


1.  BASIS OF PRESENTATION

The consolidated  financial  statements for the three months ended September 30,
1999 are unaudited.  In the opinion of management of Horizon Financial  Services
Corporation (the "Registrant" or "Company"),  these financial statements reflect
all  adjustments,  consisting only of normal  occurring  accruals,  necessary to
present fairly the consolidated  financial  position of the Company at September
30,  1999 and its results of  operations  and  statements  of cash flows for the
periods  presented.  These consolidated  financial  statements do not purport to
contain all the necessary  disclosures required by generally accepted accounting
principles that might otherwise be necessary in the  circumstances and should be
read in conjunction with the consolidated financial statements and notes therein
included in the annual report of Horizon Financial Services  Corporation for the
year  ended  June  30,  1999.  The  results  of the  periods  presented  are not
necessarily representative of the results of operations and cash flows which may
be expected for the entire year.

2.  ORGANIZATION

The Company was organized as a Delaware  corporation at the direction of Horizon
Federal  Savings  Bank (the  "Bank") for the purpose of becoming a savings  bank
holding company, as part of the conversion from a mutual to a stock institution.
The conversion was completed on June 28, 1994 with the sale of 506,017 shares of
the Company's common stock at a price of $10 per share.

3.  PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned  subsidiary,  the Bank and the Bank's wholly owned  subsidiary,
Horizon  Investment  Services,  Inc. The principal  business activity of Horizon
Investment  Services,  Inc. is to sell credit life insurance to customers of the
Bank. All material intercompany accounts and transactions have been eliminated.


                                       -5-

<PAGE>
4.  EARNINGS PER SHARE

The Company has adopted  Statement  of  Financial  Accounting  Standard  No. 128
"Earnings Per Share".  The following  provides a  reconciliation  of the amounts
used in the  determination of basic and diluted earnings per share for the three
month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
                                                               3 Months      3 Months
                                                                Ended          Ended
                                                               9/30/99        9/30/98
                                                              ---------      ---------
<S>                                                           <C>            <C>
Net Earnings (loss) .....................................     $   5,745      ($641,486)
                                                              =========      =========

Basic earnings per share:
       Weighted average shares outstanding ..............       875,062        879,942

       Less unearned employee stock ownership plan shares       (11,470)       (23,339)
                                                              ---------      ---------

Weighted average number of common shares outstanding ....       863,592        856,603
                                                              =========      =========

Earnings (loss) per common share - basic ................     $    0.01      ($   0.75)
                                                              =========      =========

Diluted earnings per share:
       Weighted average shares outstanding ..............       875,062        879,942

       Less unearned employee stock ownership plan shares       (11,470)       (23,339)

       Assumed incremental option shares
          using the treasury stock method ...............        13,916            ---
                                                                             ---------

Common and common equivalent shares outstanding .........       877,508        856,603
                                                              =========      =========

Earnings (loss) per common share - diluted ..............     $    0.01      ($   0.75)
                                                              =========      =========
</TABLE>

                                       -6-

<PAGE>
ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    -------------------------------------------------
                    CONDITION AND RESULTS OF OPERATIONS
                    -----------------------------------
GENERAL
-------

Horizon Financial Services Corporation ("the Company") is a savings bank holding
company,  the primary  asset of which is Horizon  Federal  Savings  Bank,  ("the
Bank").  The Company was  incorporated  in March 1994 and sold 506,017 shares of
common  stock on June 28, 1994 for the purpose of  acquiring  all of the capital
stock of the Bank in connection with the Bank's  conversion from mutual to stock
form of ownership (the "Conversion").

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

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

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

Some local  economic  conditions  in the Bank's market have  weakened.  The farm
economy had been strong for over five years but has now softened. As a result of
an  over-supply  of  grain,  farm  prices  for grain  and  livestock,  which are
currently  depressed,  may continue to remain  depressed.  In the event  current
economic and market conditions persist or worsen, loan demand and existing loans
may be  affected.  No  assurances  can be given  that  the Bank  will be able to
maintain or increase the balance or quality of its loan  portfolio,  which could
adversely  affect the  financial  condition  and  results of  operations  of the
Company and the Bank.
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
-----------------------------------------------

The  Company,  and its  subsidiaries  may from time to time make written or oral
"forward-looking  statements",  including  statements contained in the Company's
filings with the Securities and Exchange  Commission  (including  this Quarterly
Report on Form 10-QSB and the exhibits  hereto and  thereto),  in its reports to
stockholders and in other communications by the Company,  which are made in good
faith by the Company and the Bank  pursuant to the "safe  harbor"  provisions of
the Private Securities Litigation Reform Act of 1995.


                                       -7-

<PAGE>
These  forward-looking   statements  include  statements  with  respect  to  the
Company's  and the  Bank's  beliefs,  plans,  objectives,  goals,  expectations,
anticipations,  estimates and intentions,  that are subject to significant risks
and  uncertainties,  and are subject to change based on various factors (some of
which are  beyond  the  Company's  and the  Bank's  control).  The words  "may",
"could",  "should",  "would",  "believe",  "anticipate",  "estimate",  "expect",
"intend",   "plan"  and   similar   expressions   are   intended   to   identify
forward-looking statements. The following factors, among others, could cause the
Company's and the Bank's  financial  performance to differ  materially  from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements:

o          the strength of the United States economy in general and the strength
           of the local  economies  in which the  Company  and the Bank  conduct
           their operations;
o          the effects of, and changes in, trade,  monetary and fiscal  policies
           and laws,  including  interest rate  policies of the Federal  Reserve
           Board, inflation, interest rate, market and monetary fluctuations;
o          the timely development of and acceptance of new products and services
           of the Bank and the  perceived  overall  value of these  products and
           services  by users,  including  the  features,  pricing  and  quality
           compared to competitors' products and services;
o          the  willingness  of users to  substitute  competitors'  products and
           services for the Bank's products and services;
o          the  success  of the  Bank  in  gaining  regulatory  approval  of its
           products and services, when required;
o          the impact of changes in  financial  services'  laws and  regulations
           (including laws concerning taxes, banking, securities and insurance);
o          technological changes;
o          acquisitions;
o          changes in consumer spending and saving habits;
o          and the success of the  Company  and the Bank at  managing  the risks
           involved in the foregoing.

The foregoing list of important factors is not exclusive.  Additional discussion
of factors  affecting  the  Company's  business is  contained  in the  Company's
periodic filings with the Securities and Exchange  Commission.  The Company does
not undertake and expressly  disclaims any intent or  obligation,  to update any
forward-looking statements,  whether written or oral, that may be made from time
to time by or on behalf of the Company or the Bank.


FINANCIAL CONDITION

The  Company's  total assets at September  30, 1999 of $84.1  million  decreased
$950,000,  or 1.11%, from $85.0 million at June 30, 1999.  Securities  available
for sale decreased $3.1 million,  or 18.0% as the Company  completed the sale of
its remaining high interest rate sensitive securities. Partially offsetting this
decrease  was an increase  in cash and cash  equivalents  of $1.5  million and a
$720,000 increase in loans receivable, net.

Total  liabilities  decreased  $1.0  million,  or  1.32%,  to $76.0  million  at
September 30, 1999 from $77.0 million at June 30, 1999, primarily as a result of
a $720,000  decrease in deposits and a $320,000  decrease in advance payments by
borrowers for taxes and insurance.  There were no other  significant  changes in
the components of the Company's balance sheet.

                                       -8-

<PAGE>
RESULTS OF OPERATIONS
---------------------

The  Company's  results of operations  depend  primarily on the level of its net
interest income and non-interest income and the level of its operating expenses.
Net  interest  income  depends  upon the volume of  interest-earning  assets and
interest-bearing liabilities and interest rates earned or paid on such assets or
liabilities,  respectively. The Company's non-interest income consists primarily
of fees  charged  on  transaction  accounts  which  help  to  offset  the  costs
associated with establishing and maintaining these accounts.

Comparison  of three month  periods  ended  September 30, 1999 and September 30,
1998.

GENERAL
-------

Net earnings  increased  $647,000 to $6,000 at September 30, 1999 from a loss of
$641,000 at September 30, 1998.  This increase was primarily  attributable  to a
significant  decrease  in losses on sales of  securities  from $1.3  million  at
September 30, 1998 to $233,000 at September 30, 1999.

INTEREST INCOME
---------------

Interest  income  decreased  $102,000 to  $1,549,000  for the three month period
ended September 30, 1999 compared to $1,651,000 for the three month period ended
September  30, 1998.  The decrease was  primarily the result of a 34 basis point
decrease in the weighted  average  yield on average  interest-earning  assets to
7.74% at  September  30,  1999 as compared to 8.08% for the same period in 1998.
Contributing to the decrease was a reduction in the average outstanding balances
of  interest-earning  assets from $81.8  million at September  30, 1998 to $80.0
million at September 30, 1999.

INTEREST EXPENSE
----------------

Interest expense  decreased  $100,000 to $1.5 million for the three month period
ended  September  30, 1999  compared to $1.6  million for the three month period
ended September 30, 1998. The decrease in interest  expense was primarily due to
the weighted  average  yield on  interest-bearing  liabilities  decreasing by 36
basis  points to 4.55% at  September  30, 1999 as compared to 4.91% for the same
period in 1998.  The  average  outstanding  balance of average  interest-bearing
liabilities  decreased  $2.5 million from $78.3 million at September 30, 1998 to
$75.8 million at September 30, 1999.

NET INTEREST INCOME
-------------------

Net interest  income  decreased  $4,000 from $690,000 for the three month period
ended  September 30, 1998 to $686,000 for the three month period ended September
30, 1999.  The Company's net interest  margin  increased 3 basis points to 3.20%
for the three month period ended September 30, 1999 as compared to 3.17% for the
same period in 1998.
<PAGE>
PROVISION FOR LOSSES ON LOANS
-----------------------------

The provision for losses on loans is a result of management's  periodic analysis
of the adequacy of the Company's  allowance  for losses on loans.  The Company's
provision  for losses on loans was  $24,000 for the three  month  periods  ended
September  30,  1999  and  1998.  As  of  September  30,  1999,   the  Company's
non-performing assets, consisting of nonaccrual loans, accruing loans 90 days or
more delinquent,  real estate owned and repossessed  consumer property,  totaled
$1,093,000  or 1.30% of total  assets,  compared to $1,160,000 or 1.36% of total
assets as of June 30, 1999.  As of September 30, 1999,  the Company's  allowance
for losses on loans was $364,000,  representing  33.3% of non-performing  assets
and .64% of net loans receivable.


                                       -9-

<PAGE>
The Company continues to monitor and adjust its allowance for losses on loans as
management's analysis of its loan portfolio and economic conditions dictate. The
Company  believes it has taken an appropriate  approach  toward reserve  levels,
consistent  with the Company's loss  experiences  and  considering,  among other
factors,  the  composition  of the Company's  loan  portfolio,  the level of the
Company's classified and non-performing assets and their estimated value. Future
additions to the  Company's  allowance for losses on loans and any change in the
related ratio of the allowance for losses on loans to  non-performing  loans are
dependent  upon the economy,  changes in real estate values and interest  rates.
Because the Company has  historically  experienced  low loan losses,  management
also considers the loss experience of similar  portfolios in comparable  lending
markets.  In addition,  federal regulators may require additional  reserves as a
result of their examination of the Company.  Accordingly, the calculation of the
adequacy of the allowance for losses on loans is not based directly on the level
of  non-performing  assets.  The allowance for losses on loans reflects what the
Company currently believes is an adequate level of reserves,  although there can
be no  assurance  that  future  losses  will not exceed the  estimated  amounts,
thereby adversely affecting future results of operations.

NONINTEREST INCOME
------------------

Noninterest  income  increased  $1.1 million to ($115,000)  for the three months
ended September 30, 1999 from  ($1,179,000)  for the same period ended September
30, 1998.  The increase was  attributable  to a $1.3 million loss  recognized on
securities  at September  30, 1998 as compared to a $233,000 loss on the sale of
securities at September 30, 1999. The loss  recognized on securities  during the
three month period ended in 1998 was the result of a $1.3 million  write down on
interest only mortgage-backed  securities resulting from a decline in fair value
that was judged to be other than  temporary.  The Company  completed the sale of
its  remaining  high  interest rate  sensitive,  interest  only  mortgage-backed
securities during the period ended September 30, 1999.


NONINTEREST EXPENSE
-------------------

Total  noninterest  expense increased $37,000 from $501,000 for the three months
ended  September 30, 1998 to $538,000 for the three month period ended September
30, 1999. The increase was primarily  attributable to an increase of $19,0000 in
other  expense from $68,000 at  September  30, 1998 to $87,000 at September  30,
1999  due  to  increased  legal  fees,  office  supplies  and  postage  expense.
Advertising  expense  increased  $13,000 and data processing  expense  increased
$10,000 for the period ending  September 30, 1999 as compared to the same period
ended  September 30, 1998.  Compensation  and employee  benefits  expenses,  the
largest component of noninterest expense, decreased $15,000 for the three months
ended September 30, 1999 as compared to the same period in 1998.


TAXES ON INCOME
---------------

The  Company  had a $376,000  increase  in taxes on income  for the three  month
period ended September 30, 1999 as a result of increased net earnings.

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company's principal sources of funds are deposits and principal and interest
payments collected on mortgage loans, investments and related securities.  While
scheduled loan repayments and maturing  investments are relatively  predictable,
deposit flows and early loan  prepayments are more influenced by interest rates,
general  economic  conditions  and  competition.  Additionally,  the Company may
borrow funds from the Federal  Home Loan Bank  ("FHLB") of Des Moines or utilize
other borrowings of funds based on need,  comparative  costs and availability at
the time.


                                      -10-
<PAGE>
The Office of Thrift  Supervision  (the "OTS") requires minimum levels of liquid
assets. OTS regulations  presently require the Bank to maintain an average daily
balance of liquid assets (United States  Treasury and federal agency  securities
and other investments having maturities of five years of less) equal to at least
4.0%  of the  sum of its  average  daily  balance  of net  withdrawable  deposit
accounts and borrowings  payable in one year or less. Such  requirements  may be
changed from time to time by the OTS to reflect  changing  economic  conditions.
Such  investments  are intended to provide a source of  relatively  liquid funds
upon which the Bank may rely,  if  necessary,  to fund deposit  withdrawals  and
other  short-term  funding  needs.  The Bank  has  historically  maintained  its
liquidity ratio in excess of that  requirement.  The Bank's  liquidity ratio was
14.12% on September 30, 1999 and 11.49% on June 30, 1999.

At September  30, 1999,  the Company had advances of $16.6 million from the FHLB
of Des Moines outstanding.  The Company uses its liquidity resources principally
to meet  ongoing  commitments,  to fund  maturing  certificates  of deposit  and
deposit  withdrawals,  and to meet operating  expenses.  The Company anticipates
that it will have sufficient  funds available to meet current loan  commitments.
At September 30, 1999, the Company had outstanding  commitments to extend credit
which  amounted to  $3,217,000  (including  $1,137,000  in  available  revolving
commercial  lines of credit).  At September  30, 1999,  certificates  of deposit
scheduled  to  mature  in one year or less  totaled  $18.2  million.  Management
believes,  based on its experience to date, that a significant  portion of these
funds will remain with the Company. Management believes that loan repayments and
other  sources  of funds  will be  adequate  to meet the  Company's  foreseeable
liquidity needs.

Liquidity management is both a daily and long-term responsibility of management.
The Bank  adjusts  its  investments  in liquid  assets  based upon  management's
assessment  of (i) expected  loan demand,  (ii) expected  deposit  flows,  (iii)
yields available on interest-bearing  investments and (iv) the objectives of its
asset/liability  management  program.  Excess liquidity generally is invested in
interest-earning  overnight deposits and other short-term  government and agency
obligations.

At September  30, 1999,  the Bank had tangible and core capital of $5.8 million,
or 7.1% of adjusted total assets,  which was approximately $4.6 million and $2.5
million above the minimum  requirements of 1.5% and 4.0%,  respectively,  of the
adjusted  total assets in effect on that date. At September  30, 1999,  the Bank
had risk-based capital of $6.2 million (including $5.8 million in core capital),
or 13.0% of risk- weighted assets of $47.3 million. This amount was $2.4 million
above the 8.0% requirement in effect on that date.

YEAR 2000
---------

A great deal of information has been disseminated about the widespread  computer
problems  that may arise in the year 2000  ("Y2K").  Computer  programs that can
only distinguish the final two digits of the year entered (a common  programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment,  interest or delinquency based on the wrong date,
or are expected to be unable to compute payment, interest or delinquency.  Rapid
and accurate  data  processing  is essential to the operation of the Company and
the Bank. Data processing is also essential to most other financial institutions
<PAGE>

and many other companies. An internal committee of the Company, comprised of six
officers and one outside director, has been formed to address the potential risk
that  the Y2K  poses  for  the  Company  and  the  Bank.  Like  other  financial
institutions,  the Company is heavily dependent on their computer systems.  Many
of the  information  technology and  non-information  technology  systems of the
Company  are  already  Y2K ready,  or have been  scheduled  for  replacement  in
on-going  system plans.  Attaining Y2K readiness is an on-going  process for the
Company and the Bank.  Management  and the Board of Directors  are  committed to
achieving the goal of Y2K readiness.

Accurate data  processing is essential to the  operations of the Company and the
Bank, and a lack of accurate processing by its vendors (or by the Company or the
Bank)  could  have a  significant  adverse  impact  on the  Company's  financial
condition  and results of  operations.  The Bank has been assured by its current
data  processing  service  bureaus that their  computer  services  will function
properly on and after January l, 2000. The Bank's data processing service bureau
has advised  management that it is currently Y2K compliant.  The Company and the
Bank believe that they are taking  reasonable steps to address and remediate Y2K
issues, especially with respect to mission critical systems. The Company

                                      -11-
<PAGE>
has  received  Y2K  updates  from most of its  material  non-information  system
providers,  including but not limited to security cameras, credit/debit card and
ATM card  processors,  the  vault  alarm,  check  printers,  telephone  systems,
participation  loan  servicers,  and  institutions  the Company or Bank  invests
through or with, and based on these updates do not  anticipate  any  significant
year 2000 issues.

While the Company and the Bank have  undertaken  significant  efforts to assess,
remediate and test their  technical  systems to address Y2K  processing  issues,
they are also developing contingency plans. These contingency plans are intended
to provide alternative processes and actions in the event of systems malfunction
or  failures.  The Bank is required  to follow  Federal  Financial  Institutions
Examination    Council    guidance    advising   two   levels   of   contingency
planning-remediation  and  business-resumption.  Remediation  contingency  plans
address the actions to be taken if remediation  efforts fall behind  schedule or
appear in jeopardy of not delivering a Y2K ready system when required. Business-
resumption  contingency  plans  address the  actions  that would be taken if key
business processes could not be performed in the normal manner upon entering the
Y2K due to system or third party failures.  We have been  communicating with the
Bank's  vendors  to assess  their  progress  in  evaluating  their  systems  and
implementing  any  corrective  measures  required by them to be prepared for the
year 2000.  Year 2000 readiness  request  letters have also been sent to certain
borrowers of the Bank.  These  borrowers  were  selected  based on the aggregate
amounts owed to the Bank, the type of loans  outstanding,  and the perceived Y2K
risk based on management's knowledge of the loan customers and their operations.
To date,  the Bank has not been  advised by such  parties  that they do not have
plans in place to address and correct the issues associated with theY2K problem.
However,  if the Bank is later  informed  that  such  parties  do have  plans to
address  and  correct  the  problems  associated  with the Y2K,  there can be no
assurance  as to the  adequacy  of such  plans  or to the  timeliness  of  their
implementation. The Company will continue to monitor the Y2K continuity progress
of such  customers  and third  parties  and work  appropriately  to address  any
problems which may arise.

The Company is expensing all costs  associated  with year 2000  required  system
changes as those costs are  incurred,  and such costs are being  funded  through
operating  cash  flows.  The  total   out-of-pocket   costs  associated  withY2K
compliance  is  estimated  to be $10,000.  As of  September  30,  1999,  we have
expended  $1,000 on the Y2K  issue.  The  Company  does not  expect  significant
increases in future data processing  costs or other expenses  related to its Y2K
compliance.


                                      -12-
<PAGE>
                                     PART II
                                OTHER INFORMATION


ITEM 1.        Legal Proceedings
               -----------------

               None

ITEM 2.        Changes in Securities
               ---------------------

               None

ITEM 3.        Defaults Upon Senior Securities
               -------------------------------

               None

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

               None

ITEM 5.        Other Information
               -----------------

               None

ITEM 6.        Exhibits and Reports on Form 8-K.
               ---------------------------------

               (a)   Exhibits:
                     See Index to Exhibits

               (b) Reports on Form 8-K:
                     No reports on Form 8-K were filed during the quarter  ended
                     September 30, 1999.


                                      -13-

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirement  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
                                      Registrant


Date: November 15,1999                /s/ Robert W. DeCook
                                      --------------------
                                      Robert W. DeCook
                                      President and Chief Executive Officer




Date: November 15, 1999               /s/ Sharon McCrea
      --------------------           ------------------
                                     Sharon McCrea
                                     Vice President and Chief Financial Officer








                                      -14-

<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   Registrants
               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 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  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 in
               Registrant's 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  Exhibit  10.4  to
               Registrant's Report on Form 10-KSB for the fiscal year ended June
               30, 1994 (File No. 0-24036), is incorporated herein by reference.

    11         Statement re computation of earnings per share (See Footnote 4 of
               the  Registrant's  Notes  to  Consolidated  Financial  Statements
               contained herein)

    27         Financial Data Schedule (electronic filing only)


                                      -15-