EXHIBIT 13

<PAGE>



                                        2


                             REDWOOD FINANCIAL, INC.


Profile and Related Information

Redwood Financial,  Inc. (the Company) is a Minnesota  corporation  organized at
the direction of the board of directors of the Redwood Falls Federal Savings and
Loan Association (the  Association) to acquire all of the capital stock that the
Association  issued  upon its  conversion  from  the  mutual  to  stock  form of
ownership.  The Company is a unitary  savings  and loan  holding  company  which
generally,  under  existing  laws,  is not  restricted  in the types of business
activities  in which it may  engage,  provided  that the  Association  retains a
specified amount of its assets in  housing-related  investments.  At the present
time, because the Company does not conduct any significant business, the Company
does not intend to employ any persons other than officers of the Association but
utilizes the support staff of the Association from time to time.

The  Association is a federally  chartered  mutual savings and loan  association
headquartered in Redwood Falls, Minnesota.  The Association has two full-service
offices located in Redwood and Renville Counties, Minnesota. The Association was
founded  in 1924  and  obtained  its  current  name in 1982.  The  Association's
deposits have been federally insured by the Savings  Association  Insurance Fund
(SAIF) and its predecessor,  the Federal Savings and Loan Insurance  Corporation
(FSLIC),  since 1958. The  Association is a member of the Federal Home Loan Bank
(FHLB)  System.  The  Association  is  a  community  oriented,   retail  savings
institution offering traditional mortgage loan products. It is the Association's
intent to remain an independent  community savings and loan association  serving
the local banking needs of Redwood and Renville Counties, Minnesota.

The  Association  attracts  deposits  from the  public  and uses  such  deposits
primarily to invest in residential  lending on  owner-occupied  properties.  The
Association also originates consumer and commercial real estate loans.

Stock Market Information

Since its issuance on July 7, 1995,  the Company's  common stock has been traded
in the over-the-counter  market. The following table reflects the stock price as
published by the OTC Bulletin Board. The quotations reflect inter-dealer prices,
without retail mark-up,  mark-down, or commission,  and may not represent actual
transactions.

                                                  High bid       Low bid      
------------------------------------------------------------------------
                                              
Fiscal 1997:                                  
   First Quarter                                   $ 10            8 3/4
   Second Quarter                                    10            9 3/4
   Third Quarter                                     11 3/8       10
   Fourth Quarter                                    11           10 1/4

Fiscal 1996:                                  
   First Quarter                                   $  9 1/2        8 3/4
   Second Quarter                                     9 3/4        9 1/2
   Third Quarter                                      9 3/4        9 1/4
   Fourth Quarter                                     9 1/4        9 1/4

The number of  stockholders  of record of common stock as of June 30, 1997,  was
approximately  106.  This does not reflect the number of persons or entities who
held stock in nominee or "street" name through various  brokerage firms. At June
30, 1997, there were 961,875 shares outstanding.

                                                                     (Continued)
<PAGE>
                                       3


REDWOOD FINANCIAL, INC.

The  Company paid no dividends to holders of common stock during the fiscal year
     ended June 30, 1997 or 1996.

The  Company's  ability  to pay  dividends  to  stockholders  is  subject to the
     requirements  of  Minnesota  law.  No  dividend  may be paid by the Company
     unless its board of directors  determines  that the Company will be able to
     pay its debts in the  ordinary  course of  business  after  payment  of the
     dividend. In addition, the Company's ability to pay dividends is dependent,
     in  part,  upon  the  dividends  it  receives  from  the  Association.  The
     Association  may not declare or pay a cash  dividend on any of its stock if
     the effect thereof would cause the  Associations  regulatory  capital to be
     reduced  below  (1)  the  amount  required  for  the  liquidation   account
     established  in connection  with the  Associations  conversion  from mutual
     stock  form,  or (2) the  regulatory  capital  requirements  imposed by the
     Office of Thrift Supervision (OTS).

                      FIVE-YEAR SELECTED FINANCIAL SUMMARY
                 (dollars in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                Year ended June 30
                                                   ----------------------------------------------------
                                                     1997       1996       1995       1994        1993
-------------------------------------------------------------------------------------------------------
<S>                                                <C>         <C>        <C>        <C>         <C>
Operating results:
        Interest income                            $ 3,870      3,487      3,023      3,048       3,268
        Interest expense                             2,186      1,883      1,683      1,448       1,637
-------------------------------------------------------------------------------------------------------
        Net interest income                          1,684      1,604      1,340      1,600       1,631
        Provision for loan losses                        0          0          0          1          15
        Noninterest income                              57         61         40         54          56
        Noninterest expense                          1,352        992        775        690         653
        Income tax expense                             137        211        245        426         407
-------------------------------------------------------------------------------------------------------
        Earnings before cumulative
                effect of accounting change            252        462        360        537         612
        Cumulative effect of
                accounting change                        0          0          0        (45)          0
-------------------------------------------------------------------------------------------------------

        Net earnings                               $   252        462        360        492         612
=======================================================================================================

Net earnings per common share                      $  0.26       0.45        N/A        N/A         N/A
=======================================================================================================

Balance sheet data:
        Total assets                               $62,169     51,515     55,002     42,660      40,026
        Investment securities held to maturity      10,396     15,289     16,431     17,213      13,434
        Mortgage-backed and related
                securities held to maturity         13,874     15,805      7,874      7,774       8,936
        Investment securities available for sale     6,981          0          0          0           0
        Mortgage-backed and related
                securities available for sale        8,150          0          0          0           0
        Loans receivable, net                       20,767     16,514     15,255     15,091      15,620
        Deposits                                    46,093     38,043     35,825     37,114      35,064
        Stockholders equity                         12,342     13,157      5,656      5,295       4,804

Financial ratios:
        Return on average assets                      0.46%      0.93%      0.74%      1.17%       1.49%
        Return on average equity                      1.96       3.42       6.58       9.73       13.65
        Average equity to average assets             23.36      27.18      11.21      12.03       10.95
        Net yield on average interest-
                earning assets                        3.11       3.27       3.18       3.87        4.05

</TABLE>
                                                                  (Continued)


<PAGE>
                                        4


                             REDWOOD FINANCIAL, INC.


                      Management's Discussion and Analysis
                of Financial Condition and Results of Operations


General

At the present time, Redwood Financial,  Inc. (the Company) does not conduct any
significant  business  outside of serving as a unitary  savings and loan holding
company  for  Redwood  Falls   Federal   Savings  and  Loan   Association   (the
Association).

The  Association  converted from a  federally-chartered  mutual savings and loan
association to a federally-chartered stock savings and loan association pursuant
to its Plan of Conversion.  The conversion was effected on July 7, 1995 and as a
result,  the  following  discussion  as it describes  information  prior to this
relates to the  Association.  The principal  business of the Company through the
Association  consists of accepting  deposits from the public and investing these
funds primarily in investment  securities and loans.  The investment  securities
consist of U.S. government treasury notes and agency securities, mortgage-backed
and  related  securities,  and,  to a  lesser  extent,  collateralized  mortgage
obligations,  municipal bonds, and FHLB stock.  Loans consist primarily of loans
secured by  residential  real estate located in its market area and, to a lesser
extent,  commercial real estate loans,  commercial  loans,  agricultural  loans,
construction loans, and consumer loans.

Net  earnings are  dependent  primarily  on net  interest  income,  which is the
difference  between  interest income earned on the investment and loan portfolio
and  interest  paid on  interest-bearing  liabilities.  Net  interest  income is
determined  by (i) the  difference  between  yields  earned on  interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread) and
(ii) the  relative  amounts  of  interest-earning  assets  and  interest-bearing
liabilities.  The interest rate spread is affected by regulatory,  economic, and
competitive  factors that influence  interest  rates,  loan demand,  and deposit
flows.  To a lesser  extent,  net  earnings  also are  affected  by the level of
noninterest income,  which primarily consists of service charges and other fees.
In addition,  net earnings are affected by the level of noninterest (general and
administrative) expenses.

The  operations  of  the   Association   and  the  entire  thrift  industry  are
significantly affected by prevailing economic conditions,  competition,  and the
monetary  and  fiscal  policies  of  the  federal  government  and  governmental
agencies.  Lending  activities  are  influenced  by the demand for and supply of
housing,  competition  among  lenders,  the  level of  interest  rates,  and the
availability  of funds.  Deposit  flows and  costs of funds  are  influenced  by
prevailing market rates of interest, primarily on competing investments, account
maturities,  and the levels of personal income and savings in the  Association's
market area.

Average Balance Sheet

The  following  table sets forth certain  information  relating to the Company's
average  interest-earning  assets and interest-bearing  liabilities and reflects
the average  yield on assets and  average  cost of  liabilities  for the periods
ended June 30,  1997,  1996,  and 1995.  Such  yields  and costs are  derived by
dividing  income  or  expense  by the  average  monthly  balance  of  assets  or
liabilities,  respectively,  for the periods  presented.  Average  balances  are
derived from  month-end  balances.  Management  does not believe that the use of
month-end balances instead of daily balances has caused any material  difference
in the information presented.

                                                                     (Continued)
<PAGE>
                                        5


                             REDWOOD FINANCIAL, INC.


The table also presents  information  for the periods  indicated with respect to
the difference between the average yield earned on  interest-earning  assets and
average  rate  paid  on  interest-bearing  liabilities,  or "net  interest  rate
spread," which savings  institutions have  traditionally used as an indicator of
profitability.  Another indicator of an institution's net interest income is its
"net yield on interest-earning assets," which is its net interest income divided
by the  average  balance of  interest-earning  assets.  Net  interest  income is
affected  by  the  interest   rate  spread  and  by  the  relative   amounts  of
interest-earning assets and interest-bearing  liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.

<PAGE>
                                       6


                             REDWOOD FINANCIAL, INC.
Average Balance Sheet 

The following table sets forth certain information relating to the Association's
average  balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid.  Such yields and costs are  derived by  dividing  income or expense by the
average  balance  of  assets  or  liabilities,  respectively,  for  the  periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
                                                                               For the 12 months ended June 30         
                                                                          ---------------------------------------
                                                                                           1997                           
                                                                          -------------------------------------  
                                                                                                        Average  
                                                                            Average                      yield/  
                                                                            balance      Interest (5)    cost    
-----------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>           <C>       
Interest-earning assets:
        Loans receivable (1)                                              $18,283,543    $ 1,563,605     8.55%   
        Securities held to maturity:                                                                             
                Mortgage-backed and related securities                     14,947,287      1,044,024     6.98    
                Investment securities                                      12,689,898        749,059     5.90    
        Securities available for sale:                                                                           
                Mortgage-backed and related securities                      2,695,970        168,357     6.24    
                Investment securities                                       2,219,892        147,775     6.66    
        FHLB stock                                                            333,500         23,522     7.05    
        Other interest-earning assets (4)                                   3,017,686        173,275     5.74    
                                                                           ----------      ---------             
                                Total interest-earning assets              54,187,776      3,869,617     7.14    
                                                                           ----------      ---------             
Noninterest-earning assets                                                    610,413                            
                                                                           ----------                            
                                                                                                                 
                                Total assets                              $54,798,189                            
                                                                          ===========                            
                                                                                                                 
Interest-bearing liabilities:                                                                                    
        Passbook savings accounts                                             987,693         25,130     2.54    
        Money market savings accounts                                       7,077,184        275,769     3.90    
        Certificates of deposit                                            32,394,479      1,846,365     5.70    
        FHLB advances                                                         726,923         38,485     5.29    
                                                                           ----------      ---------             
                                Total interest-bearing liabilities         41,186,279      2,185,749     5.31    
                                                                           ----------      ---------             
Noninterest-bearing liabilities                                               785,044                            
                                                                              -------                            
                                Total liabilities                          41,971,323                            
Retained earnings                                                          12,826,866                            
                                                                           ----------                            
                                                                                                                 
                                Total liabilities and retained earnings   $54,798,189                            
                                                                          ===========                            
Net interest income                                                                      $ 1,683,868             
                                                                                         ===========             
Net interest rate spread (2)                                                                             1.83%   
                                                                                                         ====    
                                                                                                                 
Net yield on interest-earning assets (3)                                                                 3.11%   
                                                                                                         ====    
                                                                                                                 
Ratio of average interest-earning assets                                                                         
        to average interest-bearing liabilities                                                        131.57%   
                                                                                                       ======    
         
</TABLE>                                                       

<TABLE>
<CAPTION>
                                                                              For the 12 months ended June 30
                                                                          --------------------------------------
                                                                                              1996                         
                                                                           -----------------------------------  
                                                                                                       Average  
                                                                             Average                    yield/  
                                                                             balance     Interest (5)   cost    
----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>          <C>       
Interest-earning assets:
        Loans receivable (1)                                               $15,754,753   $ 1,376,334    8.74%   
        Securities held to maturity:                                                                            
                Mortgage-backed and related securities                      11,410,198       784,869    6.88    
                Investment securities                                       18,055,614     1,090,543    6.04    
        Securities available for sale:                                                                          
                Mortgage-backed and related securities                               0             0    0.00    
                Investment securities                                                0             0    0.00    
        FHLB stock                                                             330,792        23,765    7.18    
        Other interest-earning assets (4)                                    3,550,681       211,640    5.96    
                                                                            ----------     ---------            
                                Total interest-earning assets               49,102,038     3,487,151    7.10    
                                                                            ----------     ---------            
Noninterest-earning assets                                                     698,754                          
                                                                            ----------                          
                                                                                                                
                                Total assets                               $49,800,792                          
                                                                           ===========                          
                                                                                                                
Interest-bearing liabilities:                                                                                   
        Passbook savings accounts                                            1,394,964        33,968    2.44    
        Money market savings accounts                                        5,550,747       196,842    3.55    
        Certificates of deposit                                             28,561,491     1,652,027    5.78    
        FHLB advances                                                                0             0    0.00    
                                                                            ----------     ---------            
                                Total interest-bearing liabilities          35,507,202     1,882,837    5.30    
                                                                            ----------     ---------            
Noninterest-bearing liabilities                                                758,718                          
                                                                               -------                          
                                Total liabilities                           36,265,920                          
Retained earnings                                                           13,534,872                          
                                                                            ----------                          
                                                                                                                
                                Total liabilities and retained earnings    $49,800,792                          
Net interest income                                                        ===========   $ 1,604,314            
                                                                                         ===========            
Net interest rate spread (2)                                                                            1.80%   
                                                                                                        ====    
                                                                                                                
Net yield on interest-earning assets (3)                                                                3.27%   
                                                                                                        ====    
                                                                                                                
Ratio of average interest-earning assets                                                                        
        to average interest-bearing liabilities                                                       138.29%   
                                                                                                      ======    
                                               
</TABLE>                                       

<TABLE>
<CAPTION>
                                                                             For the 12 months ended June 30 
                                                                          -------------------------------------
                                                                                            1995                            
                                                                           ------------------------------------
                                                                                                        Average
                                                                              Average                    yield/
                                                                              balance    Interest (5)     cost
----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>  
Interest-earning assets:
        Loans receivable (1)                                               $15,128,730   $ 1,300,846      8.60%
        Securities held to maturity:                                       
                Mortgage-backed and related securities                       7,847,474       573,656      7.31
                Investment securities                                       16,746,430     1,017,232      6.07
        Securities available for sale:                                     
                Mortgage-backed and related securities                               0             0      0.00
                Investment securities                                                0             0      0.00
        FHLB stock                                                             327,000        25,363      7.76
        Other interest-earning assets (4)                                    2,084,790       105,947      5.08
                                                                            ----------     ---------          
                                Total interest-earning assets               42,134,424     3,023,044      7.18
                                                                            ----------     ---------          
Noninterest-earning assets                                                     767,940
                                                                            ----------
                                                                           
                                Total assets                               $42,902,364
                                                                           ===========
                                                                           
Interest-bearing liabilities:                                              
        Passbook savings accounts                                            1,212,276        30,978      2.56
        Money market savings accounts                                        6,469,209       214,906      3.32
        Certificates of deposit                                             28,544,639     1,437,363      5.04
        FHLB advances                                                                0             0      0.00
                                                                            ----------     ---------           
                                Total interest-bearing liabilities          36,226,124     1,683,247      4.65
                                                                            ----------     ---------          
Noninterest-bearing liabilities                                              1,164,783
                                                                             ---------
                                Total liabilities                           37,390,907
Retained earnings                                                            5,511,457
                                                                             ---------
                                                                           
                                Total liabilities and retained earnings    $42,902,364
Net interest income                                                        ===========   $ 1,339,797
                                                                                         ===========
Net interest rate spread (2)                                                                              2.53%
                                                                                                          ==== 
                                                                           
Net yield on interest-earning assets (3)                                                                  3.18%
                                                                                                          ==== 
                                                                           
Ratio of average interest-earning assets                                   
        to average interest-bearing liabilities                                                         116.31%
                                                                                                        ====== 
</TABLE> 

(1)  Average balances include nonaccrual loans.

(2)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.

(3)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.

(4)  Includes interest-bearing deposits in other financial institutions.

(5)  Tax-exempt  income was not significant and thus has not been presented on a
     tax equivalent  basis. Tax exempt income of $67,546,  $60,213,  and $10,380
     was  recognized  during the years  ended  June 30,  1997,  1996,  and 1995,
     respectively.

                                                               
                                                                     (Continued)
<PAGE>
                                       7


                            REDWOOD FINANCIAL, INC.

Rate/Volume Analysis
<TABLE>
<CAPTION>
                                                    Twelve months ended June 30,                 Twelve months ended June 30,
                                           --------------------------------------------     ----------------------------------------
                                                          1997 versus 1996                             1996 versus 1995      
                                                 increase/(decrease) due to changes in       increase/(decrease) due to changes in  
                                           --------------------------------------------     ----------------------------------------
                                                                   Rate/                                        Rate/           
                                              Volume     Rate      volume      Total       Volume       Rate    volume       Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>      <C>        <C>          <C>        <C>       <C>         <C>    
                                                                                                                          
Interest income:
        Loans receivable                    $ 220,915   (28,990)  (4,654)     187,271       54,714     22,057   (1,283)      75,488
Securities held to maturity:
        Mortgage-backed and related
                securities                    243,304    12,100    3,751      259,155      260,438    (33,855) (15,370)     211,213
        Investment securities                (324,085)  (24,756)   7,358     (341,483)      78,944     (7,222)   1,589       73,311
Securities available for sale:
        Mortgage-backed and related
                securities                    168,357         0        0      168,357            0          0        0            0
        Investment securities                 147,775         0        0      147,775            0          0        0            0
        FHLB stock                                195      (434)      (5)        (244)         294     (1,870)     (22)      (1,598)
        Other interest-earning assets         (31,769)   (7,761)   1,165      (38,365)      74,495     18,318   12,880      105,693
------------------------------------------------------------------------------------------------------------------------------------
                 Total interest
                   earning assets             424,692   (49,841)   7,615      382,466      468,885     (2,572)  (2,206)     464,107
------------------------------------------------------------------------------------------------------------------------------------

Interest expense:
        Passbook savings accounts              (9,917)    1,524     (445)      (8,838)       4,668     (1,458)    (220)       2,990
        Money market savings accounts          54,131    19,448    5,348       78,927      (30,511)    14,507   (2,060)     (18,064)
        Certificates of deposit               221,704   (24,128)  (3,238)     194,338          849    213,689      126      214,664
        FHLB advances                          38,485         0        0       38,485            0          0        0            0
------------------------------------------------------------------------------------------------------------------------------------
                 Total interest
                   bearing liabilities        304,403    (3,156)   1,665      302,912      (24,994)   226,738   (2,154)     199,590
------------------------------------------------------------------------------------------------------------------------------------
Net change in interest income               $ 120,289   (46,685)   5,950       79,554      493,879   (229,310)     (52)     264,517
====================================================================================================================================
</TABLE>

                                                                     (Continued)
<PAGE>
                                        8


                             REDWOOD FINANCIAL, INC.


Comparison of Operating Results for the Years Ended June 30, 1997 and 1996

In recent years,  significant new federal  legislation has imposed  numerous new
legal and regulatory requirements on financial institutions.  In addition to the
uncertainties  posed by  possible  legislative  change,  there  are  many  other
uncertainties that may make the Company's  historical  performance an unreliable
indicator of its future performance, and forward-looking information,  including
projections  of future  performance,  is subject to  numerous  possible  adverse
developments,  including but not limited to the possibility of adverse  economic
developments  which may increase default and delinquency  risks in the Company's
loan portfolios; shifts in interest rates which may result in shrinking interest
margins; deposit outflows;  interest rates on competing investments;  demand for
financial  services  and  loan  products;  increases  generally  in  competitive
pressure in the banking and financial services  industry;  changes in accounting
policies  or  guidelines,  or  monetary  and  fiscal  policies  of  the  federal
government;  changes in the quality or  composition  of the  Company's  loan and
investment portfolios; or other significant uncertainties.

Net Earnings

Net earnings  were  $252,000  for the year ended June 30,  1997,  as compared to
$462,000  for the year ended  June 30,  1996.  This  represented  a decrease  of
$210,000,  or 45.45%.  The  decrease  was  primarily  attributable  to a pre-tax
$237,000  one-time  assessment by the Federal Deposit  Insurance  Corporation to
recapitalize  the Savings  Association  Insurance Fund (SAIF).  The decrease was
also  affected by various  expenses  incurred  with the  Company's  unsuccessful
acquisition  attempt of a financial  institution.  The  decrease  was  partially
offset by an $80,000, or 4.99% increase in net interest income and a $74,000, or
35.07% decrease in income tax expense.

Net Interest Income

Net interest income increased by $80,000,  or 4.99% from $1,604,000 for the year
ended June 30, 1996 to $1,684,000 for the year ended June 30, 1997. The increase
is primarily  due to  increased  deposits  and funds from  advances  invested in
loans,  investment securities,  and mortgage-backed and related securities.  The
increase was also attributable to a modest  improvement in the Company's overall
net interest  spread.  The increase  was  partially  offset by a decrease in the
Company's interest-earning assets relative to its interest-bearing liabilities.

Average  interest-earning  assets  increased  by  $5,086,000,   or  10.36%  from
$49,102,000  for the year ended June 30, 1996, to $54,188,000 for the year ended
June 30, 1997. Average interest-bearing  liabilities increased by $5,679,000, or
15.99% from $35,507,000 for the year ended June 30, 1996, to $41,186,000 for the
year ended June 30, 1997.  While the Company's  asset base increased in the year
ended June 30,  1997,  the level of  average-interest-earning  assets to average
interest-bearing  liabilities decreased from 138.29% for the year ended June 30,
1996 to 131.57% for the year ended June 30, 1997. This decrease is attributed to
the Company's common stock  repurchases  during the 1997 fiscal year. Funds used
to repurchase stock totaled $1,227,000.  The increase in net interest income was
also affected by an increase in the Company's net interest spread from 1.80% for
the year ended June 30, 1996, to 1.83% for the year ended June 30, 1997.

                                                                     (Continued)
<PAGE>
                                        9


                             REDWOOD FINANCIAL, INC.


Interest Income

Interest  income  increased by $383,000,  or 10.98% from $3,487,000 for the year
ended June 30, 1996 to $3,870,000 for the year ended June 30, 1997. The increase
in interest income is primarily a result of the  aforementioned  increase in the
Company's average interest earning assets. The increase was also attributable to
a slight increase in the yield on average  interest  earning assets,  from 7.10%
for the year ended June 30, 1996 to 7.14% for the year ended June 30, 1997.

Interest on loans  receivable  increased by $188,000,  or 13.66% from $1,376,000
for the year ended June 30, 1996 to $1,564,000 for the year ended June 30, 1997.
The  increase  is a result of a  $2,529,000,  or 16.05%  increase in the average
balance of loans from  $15,755,000 to  $18,284,000  for the years ended June 30,
1996 and 1997, respectively.  The increase was partially offset by a decrease in
the average yield on loans from 8.74% for the year ended June 30, 1996, to 8.55%
for the year ended June 30, 1997.

Interest on  mortgage-backed  and related securities  increased by $427,000,  or
54.39%,  from  $785,000 for the year ended June 30, 1996 to  $1,212,000  for the
year  ended June 30,  1997.  The  increase  was due to a  $6,233,000,  or 54.63%
increase in the average balance of  mortgage-backed  and related securities from
$11,410,000  for the year ended June 30, 1996 to $17,463,000  for the year ended
June 30, 1997. The yield on the Company's mortgage-backed and related securities
was nearly  unchanged.  The yield was 6.88% for the year ended June 30,  1996 as
compared to 6.87% for the year ended June 30,  1997.  Since  January  1997,  the
Company has designated its mortgage-backed  and related securities  purchases as
available for sale.

Interest on investment  securities,  including FHLB stock decreased by $194,000,
or 17.41%,  from $1,114,000 for the year ended June 30, 1996 to $920,000 for the
year  ended June 30,  1997.  The  decrease  was due to a  $3,146,000,  or 17.42%
decrease in the average balance of investment  securities  from  $18,056,000 for
the year ended June 30, 1996 to  $14,910,000  for the year ended June 30,  1997.
The decrease in investment  securities is a result of the Company's  decision to
reallocate   funds  from   investment   security   maturities   into  loans  and
mortgage-backed  and related securities.  The yield on the Company's  investment
securities,  6.04% for the year ended June 30, 1996 as compared to 6.02% for the
year ended June 30, 1997, was nearly unchanged.  Since January 1997, the Company
has designated all investment security purchases as available for sale.

Interest Expense

Interest expense  increased by $303,000,  or 16.09% from $1,883,000 for the year
ended June 30, 1996 to $2,186,000 for the year ended June 30, 1997. The increase
was a  result  of  the  increase  in the  average  balance  of  interest-bearing
liabilities.  The increase was  minimally  affected by a slight  increase in the
cost of average  interest-bearing  liabilities from 5.30% to 5.31% for the years
ended June 30, 1996 and 1997, respectively.

Interest on deposits  increased  by $264,000 or 14.02% from  $1,883,000  for the
year ended June 30, 1996,  to $2,147,000  for the year ended June 30, 1997.  The
increase was due to a $4,952,000,  or 13.95%  increase in the average balance of
deposits.  There was no material change in the cost of the Company's deposits in
comparison of the two years.

Interest on FHLB advances  totaled  $38,000.  At June 30, 1997,  the Company had
FHLB advances totaling $3,500,000. There were no advances or other borrowings at
June 30, 1996. The Company  utilizes FHLB advances as an  alternative  source of
loan and investment funding.

                                                                     (Continued)
<PAGE>
                                       10


                             REDWOOD FINANCIAL, INC.


Provision for Loan Losses

The Company's provision for loan losses was $0 for the year ended June 30, 1997.
Due to lack of  substantive  problem  loans  during the  period and stable  real
estate  values  in the  Company's  market  area,  management  believed  that the
allowance for loan losses was adequate  throughout these periods.  The allowance
for loan  losses was  maintained  at  $213,000  at June 30,  1997 and 1996.  The
Company's net loan  charge-offs were $0 and $0 for the years ended June 30, 1997
and 1996, respectively. At June 30, 1997 and 1996, the allowance for loan losses
represented 1.02% and 1.27%, respectively, of loans receivable. Nonaccrual loans
totaled $14,000 and $89,000 at June 30, 1997 and 1996, respectively.

Noninterest Income

Noninterest income decreased by $5,000, or 8.20% from $61,000 for the year ended
June 30,  1996 to $56,000 for the year ended June 30,  1997.  The  decrease  was
primarily  due to $12,000 in gains  resulting  from the  disposition  of various
assets in the year ended June 30, 1996.  The decrease was partially  offset by a
$9,000  increase  in fee and service  charge  income for the year ended June 30,
1997.  In addition,  the decrease was also affected by a $3,000 gain on the sale
of investments available for sale in 1997.

Noninterest Expense

Noninterest expense increased by $360,000,  or 36.29% from $992,000 for the year
ended  June 30,  1996,  to  $1,352,000  for the year ended  June 30,  1997.  The
increase in noninterest expense was primarily due to the aforementioned $237,000
one-time  deposit  insurance  fund  assessment  and the  $102,000  in  expenses,
primarily   professional  fees,  as  a  result  of  the  Company's  unsuccessful
acquisition  attempt.  The increase was also due to a $64,000, or 9.86% increase
in compensation costs from $649,000 for the year ended June 30, 1996 to $713,000
for the year ended June 30,  1997.  The increase in  compensation  costs was due
primarily  to  increased  staffing.  The  increase  in  noninterest  expense was
partially offset by a $29,000,  or 35.80% decrease in federal deposit  insurance
premiums  from  $81,000 to $52,000  for the years  ended June 30, 1996 and 1997,
respectively.  As a result  of the  one-time  $237,000  deposit  insurance  fund
assessment,  the Association  currently pays substantially lower federal deposit
insurance  premiums.  Excluding the $102,000  aforementioned  professional  fees
incurred  with the  unsuccessful  acquisition,  professional  fees  declined  by
$33,000 in comparison of the two years.

Income Taxes

The Company's income tax expense  decreased by $74,000,  or 35.07% from $211,000
for the year ended June 30, 1996,  to $137,000 for the year ended June 30, 1997.
The decrease  was a result of decreased  earnings  before  taxes.  For the years
ended  June 30,  1996 and 1997,  earnings  before  taxes  totaled  $673,000  and
$388,000, respectively.

Financial Condition

The Company's total assets decreased by $3,487,000 or 6.34%, from $55,002,000 at
June 30, 1995 to $51,515,000 at June 30, 1996, and increased by $10,654,000,  or
20.68% to $62,169,000 at June 30, 1997. Changes in the Company's level of assets
from  June  30,  1995 to 1996  reflect  a  decrease  in  funds  held  for  stock
subscriptions.  For the year ended June 30, 1997,  this  increase is a result of
increased  deposit  growth  and use of FHLB  advances  to  fund  increased  loan
production  and purchases of investment  securities,  including  mortgage-backed
securities.

                                                                     (Continued)
<PAGE>
                                       11


                             REDWOOD FINANCIAL, INC.


The Company's  loans  receivable,  net,  increased by $1,259,000,  or 8.25% from
$15,255,000  at June 30, 1995 to  $16,514,000 at June 30, 1996, and increased by
$4,253,000,  or 25.75% to  $20,767,000 at June 30, 1997. For the year ended June
30, 1997,  this  increase  primarily  reflects  increased  residential  mortgage
lending.  The  increased  loan  portfolio  will result in increased  credit risk
exposure. The increased loan portfolio was funded through short and intermediate
term  deposits  and FHLB  advances,  which  may  result  in an  increase  in the
Company's interest-rate risk exposure.

The   Company's   securities,    which   include   investment   securities   and
mortgage-backed and related securities, increased by $6,789,000, or 27.93%, from
$24,305,000  at June 30, 1995 to  $31,094,000 at June 30, 1996, and increased by
$8,306,000  or 26.71%,  to  $39,400,000  at June 30,  1997.  The increase in the
Company's  level of  securities  during the year ended  June 30,  1996  reflects
increased cash flows  resulting from deposits and investment of a portion of the
proceeds  from the stock  conversion.  The  increase in the  Company's  level of
securities  during the year ended June 30, 1997  reflects  increased  cash flows
from deposits and FHLB  advances.  Commencing  in January 1997,  the Company has
chosen to designate  select new  investments  as available for sale. The Company
had previously  designated all  securities  held to maturity.  At June 30, 1997,
securities designated as available for sale totaled $15,131,000.

Cash and cash equivalents decreased by $11,220,000,  or 79.61%, from $14,093,000
at June 30, 1995 to $2,873,000 at June 30, 1996, and then decreased  $2,109,000,
or 73.41%,  to $764,000 at June 30,  1997.  For the years ended June 30, 1995 to
1996, the Company's cash and cash equivalents  fluctuated  primarily as a result
of funds held at June 30, 1995 for stock subscriptions.  For the year ended June
30, 1997,  the Company's  cash and cash  equivalents  fluctuated  depending upon
changes in deposits, maturity and purchases of securities, loan originations and
principal  and  interest  payments  on loans  and  mortgage-backed  and  related
securities.

The Company's  deposits  increased by $2,218,000,  or 6.19%, from $35,825,000 at
June 30, 1995 to $38,043,000  at June 30, 1996, and increased by $8,050,000,  or
21.16% to  $46,093,000 at June 30, 1997. The increase in deposits is primarily a
result of increased public deposits in each year.

FHLB advances  totaled $0, $0, and $3,500,000 at June 30, 1995,  1996, and 1997,
respectively.  During the year ended June 30, 1997,  the Company  utilized  FHLB
advances to fund  increased  loan growth and purchases of investment  securities
and mortgage-backed and related securities.

Stockholders' equity increased during the year ended June 30, 1996 by $7,501,000
or 132.62%,  from  $5,656,000 at June 30, 1995 to  $13,157,000 at June 30, 1996.
The increase was due  primarily to the  $8,549,000 in net proceeds from the sale
of the Company's  common  stock,  and the Company's net earnings of $462,000 for
the year ended June 30, 1996.  The increase was partially  offset by $541,000 in
proceeds used to repurchase the Company's common stock and $596,000 and $393,000
as a result of  unearned  employee  stock  ownership  plan  shares and  unearned
management stock bonus plan shares at June 30, 1996, respectively.

                                                                     (Continued)
<PAGE>
                                       12


                             REDWOOD FINANCIAL, INC.


Stockholders'  equity decreased during the year ended June 30, 1997 by $815,000,
or 6.19%, from $13,157,000 at June 30, 1996 to $12,342,000 at June 30, 1997. The
decrease was due primarily to the  repurchase of 106,875 shares of the Company's
common stock. As a result, the Company's treasury stock increased by $1,227,000,
or 226.80% from $541,000 at June 30, 1996,  to $1,768,000 at June 30, 1997.  The
decrease in stockholder's equity was also affected by a $3,000 adjustment due to
valuation  of the  Company's  available  for sale  securities.  The  decrease in
stockholder's  equity was  partially  offset by net  earnings for the year ended
June 30, 1997 of  $252,000,  an $86,000  decrease in unearned  management  stock
bonus plan shares,  and a $66,000 decrease in unearned  employee stock ownership
plan shares from June 30, 1996 to June 30, 1997.

Comparison of Operating Results for the Years Ended June 30, 1996 and 1995

Net Earnings

Net earnings  were  $462,000  for the year ended June 30,  1996,  as compared to
$360,000  for the year ended June 30,  1995.  This  represented  an  increase of
$102,000,  or 28.33%.  The increase was  attributable  to a $464,000,  or 15.35%
increase in total interest  income,  a $200,000,  or 11.88% increase in interest
expense on deposits,  a $21,000, or 52.50% increase in non-interest  income, and
an $218,000  or 28.17%  increase in  noninterest  expense.  The effects of these
items were  offset,  in part,  by a $34,000,  or 13.88%  decrease  in income tax
expense.

Net Interest Income

Net interest income  increased by $264,000,  or 19.70%,  from $1,340,000 for the
year ended June 30, 1995 to  $1,604,000  for the year ended June 30,  1996.  The
increase in net interest income  primarily  reflects an increase in the ratio of
average  interest-earning  assets to average  interest-bearing  liabilities from
116.31%  for the year ended June 30, 1995 to 138.29% for the year ended June 30,
1996.  However,  this was offset by a decrease in the  Company's  interest  rate
spread  from 2.53% for the year ended June 30,  1995 to 1.80% for the year ended
June 30, 1996. The decrease in the Company's  interest rate spread primarily was
caused by increases  in interest  rates during  fiscal  1996,  as the  Company's
liabilities repriced more quickly than did its assets.

Interest Income

Interest  income was $3,487,000 for the year ended June 30, 1996, as compared to
$3,023,000  for the year  ended  June 30,  1995,  representing  an  increase  of
$464,000,  or 15.35%. The increase in interest income was caused primarily by an
increase in the average  balance of  interest-earning  assets by $6,968,000,  or
16.54%, from $42,134,000 for the year ended June 30, 1995 to $49,102,000 for the
year  ended  June  30,  1996,  primarily  because  of the  funds  raised  in the
conversion  to stock  form.  This was offset in part by a decrease  between  the
periods in the average yield on interest-earning  assets from 7.18% for the year
ended June 30, 1995 to 7.10% for the year ended June 30, 1996.

Interest on loans  receivable  increased  by $75,000,  or 5.75%  during the year
ended June 30, 1996, as compared to the year ended June 30, 1995.  Such increase
was due to a increase in the average  yield on loans  receivable  from 8.60% for
the year ended June 30, 1995 to 8.74% for the year ended June 30, 1996,  as well
as a $626,000,  or 4.14%,  increase in the average  balance of loans  receivable
from  $15,129,000  for the year ended June 30, 1995 to $15,755,000  for the year
ended June 30, 1996.

                                                                     (Continued)
<PAGE>
                                       13


                             REDWOOD FINANCIAL, INC.


Interest on  mortgage-backed  and related securities  increased by $211,000,  or
36.76%  during the year ended June 30, 1996,  as compared to the year ended June
30,  1995.  Such  increase  was due to an  increase  in the  average  balance of
mortgage-backed and related securities by $3,563,000, or 45.41%, from $7,847,000
for the year  ended  June 30,  1995 to  $11,410,000  for the year ended June 30,
1996.  This  was  offset  in  part  by  a  decrease  in  the  average  yield  on
mortgage-backed  and related  securities  from 7.31% for the year ended June 30,
1995 to 6.88% for the year ended June 30,  1996.  The  increase  in the  average
balance of mortgage-backed and related securities primarily reflected a decision
to  invest a  portion  of the  proceeds  obtained  from the  stock  offering  in
mortgage-backed and related securities.

Interest on investment  securities,  including FHLB stock, increased by $71,000,
or 6.81%,  during the year ended June 30,  1996,  as  compared to the year ended
June 30, 1995. Such increase was due primarily to a $1,313,000 or 7.69% increase
in the  average  balance of  investment  securities,  as the  Company  purchased
investment  securities  during  fiscal 1996 with funds  received  from the stock
offering,  principal  payments on  mortgage-backed  and related  securities  and
repayments  of loans.  The  effect of the  increase  in the  average  balance of
securities was offset, in part, by a decrease in the average yield on investment
securities  from 6.11% for the year  ended  June 30,  1995 to 6.06% for the year
ended June 30, 1996, as maturing investment  securities were replaced with lower
yielding investment securities.

Interest Expense

Interest expense increased by $200,000,  or 11.88%, from $1,683,000 for the year
ended June 30, 1995 to $1,883,000 for the year ended June 30, 1996. The increase
in interest  expense  resulted  from an increase in the average cost of deposits
from 4.65% for the year ended June 30, 1995 to 5.30% for the year ended June 30,
1996,  resulting from increased  prevailing  market interest rates during fiscal
1996.  The effect of the increase in the average cost of deposits was  partially
offset by a $719,000,  or 1.98% decrease in the average balance of deposits from
$36,226,000  for the year ended June 30, 1995 to $35,507,000  for the year ended
June 30, 1996.

Provision for Loan Losses

The Company's provision for loan losses was $0 for the year ended June 30, 1996.
Because  of the  consistency  in the  size of the  loan  portfolio  and  lack of
significant  nonaccruing  loans during fiscal 1996 and  stabilizing  real estate
markets in the Company's market area, management believed that the allowance for
loan losses was adequate  throughout  fiscal 1996. The allowance for loan losses
was  maintained  at $213,000 at June 30, 1995 and 1996.  The  Company's net loan
charge-offs  were $0 in fiscal 1995 and $0 in fiscal 1996.  At June 30, 1996 and
1995, the allowance for loan losses  represented 1.27% and 1.38%,  respectively,
of loans receivable. Nonaccrual loans at June 30, 1996 and 1995 were $89,000 and
$0, respectively.

Noninterest Income

Noninterest  income increased by $21,000,  or 52.50%,  from $40,000 for the year
ended June 30, 1995 to $61,000 for the year ended June 30, 1996. The increase in
noninterest  income was primarily due to a $17,000 or 89.47% increase in fee and
service  charge income as a result of increased loan  originations  for the year
ended June 30, 1996.

                                                                     (Continued)
<PAGE>
                                       14


                             REDWOOD FINANCIAL, INC.


Noninterest Expense

Noninterest expense increased by $218,000, or 28.17%, from $774,000 for the year
ended June 30, 1995 to $992,000 for the year ended June 30,  1996.  The increase
in total  noninterest  expense  was  primarily  due to a  $137,000,  or  26.76%,
increase in compensation and employee  benefits from $512,000 for the year ended
June 30,  1995 to  $649,000  for the year  ended  June 30,  1996 as a result  of
expense from the Employee Stock Ownership Plan and Management  Stock Bonus Plan,
and an increase in  professional  fees from  $34,000 for the year ended June 30,
1995 to $127,000 for the year ended June 30, 1996. The increase in  professional
fees was due to the increased costs associated with being a public company.

Income Taxes

The  Company's  income tax expense was $245,000 for the year ended June 30, 1995
and $211,000 for the year ended June 30, 1996, resulting from an increase in the
base year tax bad debt  reserve  as a result of the  increase  in the  Company's
level of mortgage loans and mortgage-backed and related securities during 1996.

                                                                     (Continued)
<PAGE>
                                       15


                             REDWOOD FINANCIAL, INC.


Nonperforming Assets

The following table sets forth  information  regarding  nonaccrual  loans,  real
estate owned,  and certain other  repossessed  assets and loans. As of the dates
indicated, there were no loans modified in a troubled debt restructuring.

                                                         1997          1996
--------------------------------------------------------------------------------

Loans accounted for on a nonaccrual basis:
    Mortgage loans:
         Loan secured by 1-4 dwelling units         $          0         89,153
         All other mortgage loans                              0              0
    Nonmortgage loans                                          0              0
--------------------------------------------------------------------------------

Total                                               $          0         89,153
================================================================================

Accruing  loans which are contractually past 
  due 90 days or more:
    Mortgage loans:
         Loans secured by 1-4 dwelling units             120,902         45,352
         All other mortgage loans                              0              0
                                                               0              0
-------------------------------------------------------------------------------

Total                                               $    120,902         45,352
===============================================================================

Total nonaccrual and accrual loans                  $    120,902        134,505
===============================================================================

Real estate                                         $     13,520              0
===============================================================================

Other nonperforming assets                          $          0              0
===============================================================================

Total nonperforming assets                          $    134,422        134,505
===============================================================================

Total nonaccrual and accrual loans to net loans             0.58%          0.81%
===============================================================================

Total nonaccrual and accrual loans to total assets          0.19%          0.26%
===============================================================================

Total nonperforming assets to total assets                  0.22%          0.26%
===============================================================================

Interest  income  that  would have been  recorded  on loans  accounted  for on a
nonaccrual  basis under the original terms of such loans for the year ended June
30, 1997 and 1996 was $296 and $2,946, respectively.

                                                                     (Continued)
<PAGE>
                                       16


                             REDWOOD FINANCIAL, INC.


Analysis of the Allowance for Loan Losses

The  following  table  sets forth  information  with  respect  to the  Company's
allowance for loan losses at the dates and for the periods indicated:

                                                   At or for the year
                                                      ended June 30
                                         ---------------------------------------
                                             1997          1996          1995
--------------------------------------------------------------------------------

Allowance (at beginning of year)       $    213,034       213,034       213,034
     Charge-offs                                  0             0             0
     Recoveries                                   0             0             0
-------------------------------------------------------------------------------
Net charge-offs                                   0             0             0
Provision                                         0             0             0
-------------------------------------------------------------------------------

Allowance (at end of year)             $    213,034       213,034       213,034
===============================================================================

Allowance for loan losses as a 
     percent of total loans outstanding        1.02%         1.27%         1.38%
Net loans charged off as a percent
     of average loans outstanding              0.00          0.00          0.00


Liquidity and Capital Resources

The Company's  primary  sources of funds are deposits and proceeds from maturing
investment   securities  and  principal  and  interest  payments  on  loans  and
mortgage-backed   and  related   securities.   While  maturities  and  scheduled
amortization  of  mortgage-backed   and  related  securities  and  loans  are  a
predictable  source  of  funds,  deposit  flows  and  mortgage  prepayments  are
generally   influenced  by  general   interest   rates,   economic   conditions,
competition,  and other factors. A substantial portion of the Company's deposits
are funds from local government entities.

The primary investing activities of the Company are the origination of loans and
the purchase of investment and mortgage-backed  and related  securities.  During
the twelve months ended June 30, 1997 and 1996, the Company purchased investment
and  mortgage-backed  and related  securities in the amounts of $16,233,355  and
$12,824,899,  respectively. The primary financing activity of the Company is the
attraction of savings deposits.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Association has the ability to obtain additional  advances from the Federal Home
Loan Bank of Des Moines. In addition,  the Company's designation of selected new
investments as available for sale is intended to increase  liquidity and overall
operational flexibility.

The  Association  is  required to maintain  minimum  levels of liquid  assets as
defined  by OTS  regulations.  This  requirement,  which may be  changed  at the
direction of the OTS depending upon economic  conditions  and deposit flows,  is
based upon a percentage  of deposits  and  short-term  borrowings.  The required
minimum ratio is currently 5.0%.

                                                                     (Continued)
<PAGE>
                                       17


                             REDWOOD FINANCIAL, INC.


The Company's most liquid assets are cash and cash equivalents. In addition, the
Company  maintains  a portfolio  of readily  marketable  investment  securities,
including  mortgage-backed and related securities which are designated available
for sale.  If necessary,  these  investment  securities  may be sold to increase
cash;  however,  the disposition of such may result in the recognition of a gain
or loss. The levels of cash and investment securities, including mortgage-backed
and related securities, are dependent on the Company's operating, financing, and
investing  activities  during any given period.  At June 30, 1997 and 1996, cash
and cash equivalents totaled $764,000 and $2,873,000,  respectively.  Investment
securities,   including   mortgage-backed  and  related  securities   designated
available  for  sale  totaled  $15,131,000  and $0 at June 30,  1997  and  1996,
respectively.

Federal savings institutions are required to satisfy three capital requirements:
(i) a requirement that tangible capital equal or exceed 1.5% of adjusted total
assets, (ii) a requirement that core-capital  equal or exceed 3.0% of adjusted
total  assets,  and (iii) a  risk-based  capital  standard  currently of 8.0% of
risk-adjusted  assets. At June 30, 1997, the Association met each of the three
capital requirements.

Impact of Inflation and Changing Prices

The consolidated  financial  statements and notes thereto  presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial  position and operating results in terms of
historical  dollars without  considering  the change in the relative  purchasing
power of money  over  time and due to  inflation.  The  impact of  inflation  is
reflected  in the  increased  cost  of the  Company's  operations.  Unlike  most
industrial  companies,  nearly all the assets and liabilities of the Company are
monetary in nature.  As a result,  interest  rates have a greater  impact on the
Company's  performance  than do the  effects  of  general  levels of  inflation.
Interest  rates do not  necessarily  move in the same  direction  or to the same
extent as the price of goods and services.

Recent Developments

   (1)   Automated Data Processing System

         During  the  quarter  ended  June  30,  1997,  the  Association   began
         implementation  of a conversion from its present manual data processing
         system to an automated  in-house data  processing  system.  The lack of
         such an automated data processing system had been previously  disclosed
         in the Company's initial prospectus. The Association intends to utilize
         the automated data processing system for enhancing revenues through the
         development of new loan and deposit products.  The Association  expects
         to complete its  conversion to the automated  in-house data  processing
         system in October 1997. It is expected that the automated in-house data
         processing system will cost approximately $9,000 per quarter.

   (2)   Elimination of the Thrift Charter

         Recent  legislation  now  in  debate  in  Congress  could  lead  to the
         elimination of the thrift  charter,  and the resulting  conversation of
         all thrifts to state or national banks.  Other elements of the proposed
         legislation  would  also  combine  the  deposit  insurance  fund of the
         commercial banking industry with that insuring the thrift industry.  It
         is unknown how this proposed  legislation  would affect the Association
         or the Company at this time.

                                                                     (Continued)
<PAGE>

                             REDWOOD FINANCIAL, INC.

                        Consolidated Financial Statements

                          June 30, 1997, 1996, and 1995


<PAGE>
                                       18





                          Independent Auditors' Report





The Board of Directors
Redwood Financial, Inc.:


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Redwood
Financial,  Inc. and  subsidiary  (the Company) as of June 30, 1997 and 1996 and
the related consolidated statements of earnings,  stockholders' equity, and cash
flows for each of the years in the three-year  period ended June 30, 1997. These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Redwood Financial,
Inc.  and  subsidiary  at June  30,  1997 and  1996,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended June 30, 1997 in conformity with generally accepted accounting principles.




/s/KPMG Peat Marwick LLP

August 8, 1997


<PAGE>
                                       19

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                          Consolidated Balance Sheets

                             June 30, 1997 and 1996
<TABLE>
<CAPTION>

                                Assets                                                  1997            1996
--------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>   
Cash                                                                              $     15,314          15,345
Interest bearing deposits with banks                                                   748,478       2,857,818
--------------------------------------------------------------------------------------------------------------
                                Cash and cash equivalents                              763,792       2,873,163

Securities available for sale:
        Mortgage-backed and related securities (amortized cost $8,143,694            8,149,752               0
                and $0, respectively)
        Investment securities (amortized cost $6,992,534 and $0, respectively)       6,981,250               0
--------------------------------------------------------------------------------------------------------------
                                Total securities available for sale                 15,131,002               0

Securities held to maturity:
        Mortgage-backed and related securities (market value
                $14,082,280 and $15,772,242, respectively)                          13,873,801      15,805,305
        Investment securities (market value $10,399,446
                and $15,192,588, respectively                                       10,395,659      15,288,913
--------------------------------------------------------------------------------------------------------------
                                Total securities held to maturity                   24,269,460      31,094,218

Loans receivable, net                                                               20,766,539      16,513,727
Federal Home Loan Bank stock, at cost                                                  333,500         333,500
Accrued interest receivable                                                            613,357         553,856
Premises and equipment, net                                                            212,067          52,187
Real estate, net                                                                        13,520               0
Other assets                                                                            65,679          93,992
--------------------------------------------------------------------------------------------------------------
                                Total assets                                      $ 62,168,916      51,514,643
==============================================================================================================


                     Liabilities and Stockholders Equity
--------------------------------------------------------------------------------------------------------------
Deposits                                                                            46,093,213      38,042,529
Federal Home Loan Bank advances                                                      3,500,000               0
Advance payments by borrowers for taxes and insurance                                   69,744          55,686
Accrued expenses and other liabilities                                                 163,926         259,392
--------------------------------------------------------------------------------------------------------------
                                Total liabilities                                   49,826,883      38,357,607
--------------------------------------------------------------------------------------------------------------

Common stock ($.10 par value). Authorized and issued 1,125,000 shares;
        outstanding 961,875 shares at June 30, 1997; 1,068,750 at June 30, 1996        112,500         112,500
Additional paid-in capital                                                           8,467,833       8,457,017
Retained earnings, subject to certain restrictions                                   6,369,591       6,118,091
Net unrealized loss on securities available for sale                                    (3,135)              0
Unearned employee stock ownership plan shares                                         (529,504)       (595,744)
Unearned management stock bonus plan shares                                           (306,797)       (393,422)
Treasury stock, at cost, 163,125 shares at June 30, 1997;
        56,250 at June 30, 1996                                                     (1,768,455)       (541,406)
--------------------------------------------------------------------------------------------------------------
                                Total stockholders equity                           12,342,033      13,157,036
--------------------------------------------------------------------------------------------------------------

                                Total liabilities and stockholders equity         $ 62,168,916      51,514,643
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.         

                                                                     (Continued)
<PAGE>
                                       20

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                      Consolidated Statements of Earnings

                   Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
                                                                         1997          1996         1995 
----------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>      
Interest income:
        Loans receivable                                              $1,563,605    1,376,334    1,300,846
        Securities held to maturity:
                Mortgage-backed and related securities                 1,044,024      784,869      573,656
                Investment securities                                    772,581    1,114,308    1,042,595
        Securities available for sale:
                Mortgage-backed and related securities                   168,357            0            0
                Investment securities                                    147,775            0            0
        Cash equivalents                                                 173,275      211,640      105,947
----------------------------------------------------------------------------------------------------------
                                Total interest income                  3,869,617    3,487,151    3,023,044

Interest expense on Federal Home Loan Bank advances                       38,485            0            0
Interest expense on deposits                                           2,147,264    1,882,837    1,683,247
----------------------------------------------------------------------------------------------------------
                                                                       2,185,749    1,882,837    1,683,247
----------------------------------------------------------------------------------------------------------

                                Net interest income                    1,683,868    1,604,314    1,339,797
----------------------------------------------------------------------------------------------------------

Provision for losses on loans                                                  0            0            0
----------------------------------------------------------------------------------------------------------
                                Net interest income after provision
                                        for losses on loans            1,683,868    1,604,314    1,339,797
----------------------------------------------------------------------------------------------------------

Noninterest income:
        Gain on sale of securities available for sale                      2,863            0            0
        Fees and service charges                                          45,231       36,197       18,947
        Other                                                              8,384       24,314       20,656
----------------------------------------------------------------------------------------------------------
                                Total noninterest income                  56,478       60,511       39,603
----------------------------------------------------------------------------------------------------------

Noninterest expense:
        Compensation and employee benefits                               713,001      648,859      511,502
        Advertising                                                       19,210       16,411       16,525
        Occupancy                                                         31,746       28,181       27,976
        Federal deposit insurance premiums                                51,851       80,769       84,370
        Professional fees                                                195,493      126,781       34,054
        Deposit insurance fund assessment                                237,085            0            0
        Other                                                            103,792       90,880       99,948
----------------------------------------------------------------------------------------------------------
                                Total noninterest expense              1,352,178      991,881      774,375
----------------------------------------------------------------------------------------------------------

                                Earnings before income taxes             388,168      672,944      605,025

Income tax expense                                                       136,668      210,512      244,720
----------------------------------------------------------------------------------------------------------

                                Net earnings                          $  251,500      462,432      360,305
==========================================================================================================

Net earnings per common share                                         $     0.26         0.45          N/A

Weighted average number of shares outstanding                            962,193    1,018,267          N/A
</TABLE>
                                                                  
See accompanying notes to consolidated financial statements. 

                                                                     (Continued)
<PAGE>

                                     21

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                Consolidated Statements of Stockholders' Equity

                   Years ended June 30, 1997, 1996, and 1995

<TABLE>
<CAPTION>
                                                                       Net      Unearned                          
                                                                    unrealized  Employee     Unearned       
                                                                     loss on      Stock      management              
                                              Additional            securities  Ownership      stock                     Total
                                   Common      paid-in    Retained   available     Plan       bonus       Treasury    stockholders
                                   stock       capital    earnings   for sale     Shares     plan shares   stock         equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>        <C>           <C>     <C>       <C>          <C>            <C>       
Balance on June 30, 1994          $      0             0  5,295,354          0         0         0              0      5,295,354
                                                                                                                               0
        Net earnings                     0             0    360,305          0         0         0        360,305
------------------------------------------------------------------------------------------------------------------------------------
Balance on June 30, 1995                 0             0  5,655,659          0         0         0              0      5,655,659

        Net earnings                     0             0    462,432          0         0         0              0        462,432

        Sale of common stock       112,500     8,436,861          0          0         0         0              0      8,549,361

        Adoption of employee
                stock ownership 
                plan                     0             0          0          0  (661,984)        0              0       (661,984)

        Earned employee stock
                ownership plan 
                shares, net              0        10,781          0          0    66,240         0              0         77,021

        Repurchase of common
                stock                    0             0          0          0         0         0       (965,156)      (965,156)

        Adoption of management
                stock bonus plan         0         9,375          0          0         0  (433,125)       423,750              0

        Earned management stock
                bonus plan 
                shares                   0             0          0          0         0    39,703              0         39,703
------------------------------------------------------------------------------------------------------------------------------------

Balance on June 30, 1996           112,500     8,457,017  6,118,091          0  (595,744) (393,422)      (541,406)    13,157,036

        Net earnings                     0             0    251,500          0         0         0              0        251,500

        Repurchase of common 
                stock                    0             0          0          0         0         0     (1,227,049)    (1,227,049)

        Net unrealized loss on 
                securities 
                available
                for sale, net            0             0          0     (3,135)        0         0              0         (3,135)

        Earned employee stock
                ownership plan
                shares, net              0        10,816          0          0    66,240         0              0         77,056

        Earned management stock
                bonus plan shares        0             0          0          0         0    86,625              0         86,625
------------------------------------------------------------------------------------------------------------------------------------

Balance on June 30, 1997          $112,500     8,467,833  6,369,591     (3,135) (529,504) (306,797)    (1,768,455)    12,342,033
====================================================================================================================================
</TABLE>
                                          
See accompanying notes to consolidated financial statements. 

<PAGE>
                                       22

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                   Years ended June 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
                                                                                                 1997         1996         1995 
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>           <C>          <C>      
Operating activities:
        Net earnings                                                                       $    251,500      462,432      360,305
        Adjustments to reconcile net earnings to net
                cash provided by operating activities:
                        Depreciation                                                             16,742       16,992       17,354
                        Amortization of premiums and discounts, net                             (36,232)     (40,057)     (34,683)
                        (Increase) decrease in other assets                                      28,313       15,440      (28,655)
                        (Increase) decrease in accrued interest receivable                      (59,501)    (144,272)      40,345
                        Increase (decrease) in accrued interest payable                         221,379      (50,453)      69,452
                        Gain on sale of securities available for sale                            (2,863)           0            0
                        Amortization of unearned ESOP shares                                     66,240       66,240            0
                        Earned ESOP shares priced above original cost                            10,816       10,781            0
                        Earned Management Stock Bonus Plan shares                                86,625       39,703            0
                        Change in deferred income taxes                                         (56,854)      45,726       57,281
                        (Decrease) increase in accrued expenses and other liabilities ..        (36,522)     (34,617)      78,542
                        Federal Home Loan Bank stock dividend                                         0       (6,500)           0
------------------------------------------------------------------------------------------------------------------------------------
                                        Net cash provided by operating activities               489,643      381,415      559,941
------------------------------------------------------------------------------------------------------------------------------------

Investing activities:
        Proceeds from maturities of investment securities held to maturity                    4,895,000    4,000,200    1,200,000
        Purchases of investment securities held to maturity                                           0   (2,860,069)    (430,000)
        Purchases of mortgage-backed and related securities held
                to maturity                                                                           0   (9,964,830)  (1,510,000)
        Principal collected on mortgage-backed and related securities held
                to maturity                                                                   1,927,523    2,075,679    1,456,544
        Purchases of investment securities available for sale                                (7,988,700)           0            0
        Proceeds from sales of investment securities available for sale                         999,376            0            0
        Purchases of mortgage-backed and related securities available for sale               (8,244,655)           0            0
        Principal collected on mortgage-backed and related securities available
                for sale                                                                        135,675            0            0
        Increase in loans receivable, net                                                    (4,262,925)  (1,350,152)    (164,075)
        Purchases of premises and equipment                                                    (176,622)      (5,268)     (14,855)
------------------------------------------------------------------------------------------------------------------------------------
                                        Net cash (used) provided by investing activities    (12,715,328)  (8,104,440)     537,614
------------------------------------------------------------------------------------------------------------------------------------

Financing activities:
        (Decrease) increase in funds held for stock subscriptions                                     0  (13,127,630)  13,127,630
        (Decrease) increase in deferred stock conversion costs                                        0      439,015     (439,015)
        Increase (decrease) in deposits, net                                                  7,829,305    2,267,713   (1,358,372)
        Increase in advance payments by borrowers for taxes and insurance                        14,058        2,204        6,513
        Proceeds from sale of common stock                                                            0    8,549,361            0
        Adoption of ESOP                                                                              0     (661,984)           0
        Proceeds from Federal Home Loan Bank advances                                         5,500,000            0            0
        Repayment of Federal Home Loan Bank advances                                         (2,000,000)           0            0
        Repurchase of common stock                                                           (1,227,049)    (965,156)           0
------------------------------------------------------------------------------------------------------------------------------------
                                        Net cash (used) provided by financing activities     10,116,314   (3,496,477)  11,336,756
------------------------------------------------------------------------------------------------------------------------------------

                                        (Decrease) increase in cash and cash equivalents     (2,109,371) (11,219,502)  12,434,311

Cash and cash equivalents, beginning of year                                                  2,873,163   14,092,665    1,658,354
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                                     $    763,792    2,873,163   14,092,665
====================================================================================================================================

Supplemental disclosures of cash flow information:
        Cash paid during the period for:
                Interest                                                                   $  1,964,370    1,933,290    1,613,795
                Income taxes                                                                    272,505      175,101      224,979

Supplemental noncash flow disclosures:
        Transfer of loans to real estate                                                   $     13,520            0            0

</TABLE>
See accompanying notes to consolidated financial statements.

                                                                     (Continued)
<PAGE>

                                       23


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                                  June 30, 1997


    (1)   Redwood Financial, Inc.

          Redwood Financial,  Inc. (the Company) was incorporated under the laws
              of the State of Minnesota  for the purpose of becoming the savings
              and loan holding company of Redwood Falls Federal Savings and Loan
              Association (the Association) in connection with the Association's
              conversion  from a  federally-chartered  mutual  savings  and loan
              association  to  a  federally-chartered  stock  savings  and  loan
              association, pursuant to its Plan of Conversion.

          The Company  commenced on May 22, 1995 a  Subscription  and  Community
              Offering of its shares in  connection  with the  conversion of the
              Association  (the  Offering).  The Offering was closed on June 22,
              1995 and final  approval for the  conversion was received from the
              Office of Thrift Supervision on July 7, 1995 (see note 18).

          The Company  had  not  transacted  any  material  business  activities
              through  June  30,  1995  other  than  those  associated  with the
              preparations   for  the  issuance  of  stock.   Accordingly,   the
              consolidated  statement of earnings  included  herein for the year
              ended June 30, 1995 is for the Association.

    (2)   Summary of Significant Accounting Policies

          The accounting   and  reporting   policies  of  the  Company  and  its
              subsidiary  conform to generally accepted  accounting  principles.
              The following summarizes the more significant  accounting policies
              the Company  follows in preparing and presenting its  consolidated
              financial statements:

                 Basis of Presentation

                 Theaccompanying  consolidated  financial statements include the
                    accounts of the Company and the Association. All significant
                    intercompany  account  balances and  transactions  have been
                    eliminated in consolidation.

                 Material Estimates

                 In preparing the consolidated financial statements,  management
                    is required to make  estimates and  assumptions  that affect
                    the  reported  amounts of assets and  liabilities  as of the
                    date of the balance  sheet and revenues and expenses for the
                    period. Actual results could differ significantly from those
                    estimates.

                 A  material  estimate  that  is  particularly   susceptible  to
                    significant   change  in  the   near-term   relates  to  the
                    determination of the allowance for loan losses.

                                                                     (Continued)
<PAGE>
                                       24


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


                 Management  believes  that the allowance for losses on loans is
                    adequate.  While  management  uses available  information to
                    recognize losses on loans, future additions to the allowance
                    may be necessary based on changes in economic conditions. In
                    addition,  various regulatory agencies,  as an integral part
                    of  their  examination  process,   periodically  review  the
                    allowance  for losses on loans.  Such  agencies  may require
                    additions to the  allowance  based on their  judgment  about
                    information   available   to  them  at  the  time  of  their
                    examination.

                 Reclassifications

                 Certain amounts in the  consolidated  financial  statements for
                    prior  years  have been  reclassified  to  conform  with the
                    current year presentation.

                 Investment Securities and Mortgage-Backed Securities

                 In May 1993, the Financial Accounting  Standards  Board  (FASB)
                    issued  Statement of Financial Accounting  Standards  (SFAS)
                    No. 115,  Accounting  for Certain  Investments in Debt and 
                    Equity Securities.  This statement addresses the  accounting
                    and  reporting  for  securities  by  classifying  them  into
                    three categories:  securities  held  to  maturity,   trading
                    securities,   and   securities    available    for     sale.
                    The Association adopted SFAS No. 115  as  of  July 1,  1994.
                    There was no  impact  of  adoption  on   the   Association's
                    financial    statements    as   the  Association's   entire 
                    portfolio  of  securities was classified as held to maturity
                    upon adoption.

                 Trading  securities  are  bought and held  principally  for the
                    purpose of selling them in the near term. The Company had no
                    securities  classified  as trading  for the years ended June
                    30, 1997, 1996 and 1995.

                 Securities  available for sale are carried at market value. Net
                    unrealized gains and losses, net of tax effect, are included
                    as a separate component of stockholders' equity.

                 Securities held to maturity are carried at amortized  cost,  as
                    management has the ability and positive  intent to hold them
                    to maturity.

                 Discounts and premiums on  securities  are  amortized to income
                    using the level yield method over the estimated  life of the
                    security.  Gains and losses on the sale of  securities,  are
                    determined using the specific identification method.

                 Loans Receivable

                 Loans are considered  long-term  investments and,  accordingly,
                    are carried at historical cost.

                 The allowance for  loan  losses  is  maintained  at  an  amount
                    considered  adequate to provide  for  probable  losses.  The
                    allowance  for loan losses is based on periodic  analysis of
                    the  loan  portfolio  by   management.   In  this  analysis,
                    management considers factors including,  but not limited to,
                    specific  occurrences,  general  economic  conditions,  loan
                    portfolio composition,  and historical experience. Loans are
                    charged   off  to  the   extent   they  are   deemed  to  be
                    uncollectible.

                                                                     (Continued)
<PAGE>
                                       25


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


                 Interest income is  recognized  on an accrual basis except when
                    collectibility  is in doubt as  determined on a loan by loan
                    basis.  When  interest  accruals  are  suspended,   interest
                    previously  accrued is  reversed.  Interest is  subsequently
                    recognized as income to the extent cash is received when, in
                    management's judgment, principal is collectible.

                 Effective July 1, 1995, the  Association  adopted SFAS No. 114,
                    Accounting  by Creditors  for  Impairment of a Loan and SFAS
                    No.  118,  Accounting  by  Creditors  for  Impairment  of  a
                    Loan--Income   Recognition   and   Disclosures.   Under  the
                    Company's credit policies and practices,  all nonaccrual and
                    restructured construction,  agriculture, and commercial real
                    estate  loans meet the  definition  of impaired  loans under
                    SFAS No. 114 and SFAS No. 118.  Impaired loans as defined by
                    SFAS No. 114 and SFAS No.  118  exclude  consumer  loans and
                    residential real estate loans classified as nonaccrual. Loan
                    impairment  is  measured  based  on  the  present  value  of
                    expected   future  cash  flows   discounted  at  the  loan's
                    effective interest rate or, as a practical expedient, at the
                    observable market price of the loan or the fair value of the
                    collateral if the loan is collateral dependent. The adoption
                    of SFAS No.  114 and SFAS  No.  118 did not have a  material
                    effect on the  Company's  financial  position  or results of
                    operation.

                 Loan  origination  fees and certain  related  direct  costs are
                    deferred  and   amortized  to  interest   income  using  the
                    effective interest method over the life of the loan.

                 Discounts and premiums on loans  originated  or  purchased  are
                    deferred  and  amortized  to income  using  the  level-yield
                    method over the estimated average loan life.

                 Real Estate

                 Real estate owned or expected to be acquired in  settlement  of
                    loans is  carried at the lower of the  unpaid  loan  balance
                    plus  settlement  costs or estimated fair value less selling
                    costs. After acquisition, costs of capital improvements made
                    to  facilitate  sales are  capitalized  as  incurred.  Costs
                    incurred for holding  properties after the redemption period
                    are expensed  currently.  The carrying  value of  individual
                    properties  is  periodically  evaluated  and  reduced to the
                    extent cost exceeds estimated fair value less selling costs.
                    Gains on the sales of such real  estate are  recorded at the
                    time of closing.

                 Cash Equivalents

                 Cash  equivalents  primarily  represent  amounts  on deposit at
                    other  financial  institutions  and highly liquid  financial
                    instruments with original maturities at the date of purchase
                    of three months or less.

                 Premises and Equipment

                 Land is carried at cost.  Premises and  equipment are stated at
                    cost less accumulated depreciation. Depreciation is computed
                    on a straight-line  basis over the estimated useful lives of
                    35 to 40 years for  buildings,  20 to 25 years for  building
                    improvements, and 2 to 11 years for furniture and equipment.

                                                                     (Continued)
<PAGE>
                                       26


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


                 Impairment of Long-Lived Assets and for Long-Lived
                 Assets to be Disposed of

                 Effective  July 1, 1996,  the  Company  adopted  SFAS No.  121,
                    Accounting for the  Impairment of Long-Lived  Assets and for
                    Long-Lived  Assets to be Disposed  of. The  Company  reviews
                    long-lived assets and certain  identifiable  intangibles for
                    impairment  whenever  events  or  changes  in  circumstances
                    indicate  that the  carrying  amount  of an asset may not be
                    recoverable.  The effect of adopting SFAS No. 121 on July 1,
                    1996  did  not  have a  material  impact  on  the  Company's
                    financial condition or the results of its operations.

                 Income Taxes

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

                 Stock-Based Compensation

                 Effective  July 1, 1996,  the  Company  adopted  SFAS No.  123,
                    Accounting  for  Stock-Based  Compensation.  It  elected  to
                    continue   using  the  accounting   methods   prescribed  by
                    Accounting Principles Board (APB) Opinion No. 25 and related
                    interpretations  which measure  compensation  cost using the
                    intrinsic value method. The Company has included in note 12,
                    Employee Benefits the impact of the fair value of employee
                    stock-based  compensation  plans on net income and  earnings
                    per share on a pro forma basis for awards granted after July
                    1, 1995.

                 New Accounting Standards

                 Effective  July 1, 1997, the Company  adopted the provisions of
                    Statement of Financial  Accounting Standards (SFAS) No. 125,
                    Accounting  for  Transfers  and   Servicing   of   Financial
                    Assets and Extinguishments  of Liabilities,  not deferred by
                    SFAS No. 127,  Deferral of  the  Effective Date  of  Certain
                    Provisions  of FASB  Statement No. 125. The adoption of SFAS
                    No. 125 did not impact the Company's financial condition  or
                    results of operations.

                                                                     (Continued)
<PAGE>
                                       27


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


                 In February  1997,  the Financial  Accounting  Standards  Board
                    issued  SFAS  No.  128,  Earnings  per Share.  SFAS  No. 128
                    establishes  standards for computing and presenting earnings
                    per share (EPS) and applies to entities with  publicly  held
                    common  stock  or  potential  common  stock.  SFAS  No.  128
                    supersedes the standards for computing EPS previously  found
                    in   Accounting  Principles   Board  (APB)  Opinion  No. 15,
                    Earnings per Share. SFAS No. 128 is effective  for financial
                    statements  issued  for  periods  ending  after December 15,
                    1997,  including  interim  periods;  earlier  application is
                    not permitted.  SFAS No. 128  requires  restatement  of  all
                    prior-period EPS data  presented.  Management  is  currently
                    determining  what  effect SFAS  No. 128  will  have  on  the
                    Company's results of operations.

                 In February 1997, the FASB issued SFAS No. 129,  Disclosure of
                    Information   about  Capital   Structure,   which  codifies
                    existing   disclosure    requirements    regarding   capital
                    structure.   SFAS  No.  129  is  not   expected  to  have  a
                    significant   impact  on  the  Company's   current   capital
                    structure disclosures.

                 In June  1997,  the  FASB  issued  SFAS  No.  130,   Reporting
                    Comprehensive   Income,  which  establishes  standards  for
                    reporting  and  display  of  comprehensive  income  and  its
                    components  in  a  full  set  of  general-purpose  financial
                    statements.  SFAS No.  130 is  effective  for  fiscal  years
                    beginning  after December 15, 1997.  Management is currently
                    determining what effect adoption of this statement will have
                    on the reporting of its financial information.

    (3)   Earnings Per Share

          Earnings per share  are  based  upon the  weighted  average  number of
              common   shares  and  common  stock   equivalents,   if  dilutive,
              outstanding  during the period.  The only common stock equivalents
              are stock  options.  The weighted  average  number of common stock
              equivalents is calculated  using the treasury stock method.  Under
              this method  unallocated  employee stock ownership plan shares are
              not considered  outstanding  for purposes of calculating  earnings
              per share.

          Earnings per share  amounts  for the year ended June 30, 1995 have not
              been presented in the consolidated  statements of earnings because
              the  Association did not convert to stock form until July 7, 1995.
              Net  earnings  per common share were  calculated  using  1,018,267
              shares and 962,193 shares as the weighted average number of shares
              outstanding   for  the  years   ended  June  30,  1996  and  1997,
              respectively.

                                                                     (Continued)
<PAGE>
                                       28


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


    (4)   Securities Held to Maturity

          Securities  held to maturity at June 30, 1997 and 1996 are  summarized
as follows:
<TABLE>
<CAPTION>
                                                                 June 30, 1997
                                       ------------------------------------------------------------------
                                                              Gross          Gross
                                          Amortized        unrealized      unrealized       Approximate
                                             cost             gains          losses         market value
  -------------------------------------------------------------------------------------------------------
<S>                                  <C>                    <C>            <C>             <C>      
  Investment securities:
     U.S. Government agency
         bonds                       $     3,743,759          34,800         (4,388)          3,774,171
     U.S. Treasury notes                   5,502,262           4,234        (28,441)          5,478,055
     Municipal bonds                       1,149,638           2,353         (4,771)          1,147,220
  -------------------------------------------------------------------------------------------------------

  Total investment securities        $    10,395,659          41,387        (37,600)         10,399,446
=========================================================================================================

  Mortgage-backed and
  related securities:
         GNMA certificates                   205,122          94,839              0             299,961
         FHLMC certificates                9,358,524         121,853        (16,893)          9,463,484
         FHLMC collateralized
            mortgage obliga-
            tions                             58,548           3,297              0              61,845
         FNMA certificates                 4,251,607          12,100         (6,717)          4,256,990
  -------------------------------------------------------------------------------------------------------

  Total mortgage-backed and
     related securities              $    13,873,801         232,089        (23,610)         14,082,280
=========================================================================================================
</TABLE>

                                                                     (Continued)
<PAGE>
                                       29


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>
                                                                 June 30, 1996
                                       ------------------------------------------------------------------
                                                            Gross          Gross
                                         Amortized       unrealized      unrealized       Approximate
                                           cost             gains          losses         market value
  -------------------------------------------------------------------------------------------------------
<S>                                  <C>                    <C>           <C>               <C>      
  Investment securities:
      U.S. Government agency
         bonds                       $     6,092,875          24,627        (19,049)          6,098,453
      U.S. Treasury notes                  7,654,214           7,245        (90,068)          7,571,391
      Municipal bonds                      1,541,824             918        (19,998)          1,522,744
  -------------------------------------------------------------------------------------------------------

  Total investment securities        $    15,288,913          32,790       (129,115)         15,192,588
  =======================================================================================================

  Mortgage-backed and
  related securities:
         GNMA certificates                   252,258         101,952              0             354,210
         FHLMC certificates               10,847,779          75,606       (148,227)         10,775,158
         FHLMC collateralized
           mortgage obliga-
           tions                              78,194           1,519              0              79,713
         FNMA certificates                 4,627,074               0        (63,913)          4,563,161
  -------------------------------------------------------------------------------------------------------

  Total mortgage-backed and
      related securities             $    15,805,305         179,077       (212,140)         15,772,242
=========================================================================================================
</TABLE>

          There were no sales of securities held to maturity for the years ended
              June 30, 1997, 1996, or 1995.

          Accrued interest  receivable on securities held to maturity aggregated
              $270,226 and $452,492 at June 30, 1997 and 1996, respectively.

          The carrying  amount  and  approximate   market  value  of  investment
              securities  and  mortgage-backed  and related  securities  held to
              maturity at June 30, 1997 and 1996, by contractual  maturity,  are
              shown below:
<TABLE>
<CAPTION>
                            June 30, 1997                        June 30, 1996
                  ----------------------------------   ----------------------------------
                      Carrying         Approximate         Carrying         Approximate
                       amount          market value         amount          market value
-----------------------------------------------------------------------------------------

<S>                <C>                 <C>                <C>               <C>      
Due within one
   year            $   3,661,102         3,665,190          4,308,546         4,327,575
Due  after one
   year through 
   five years         12,976,574        12,989,956         18,296,351        18,067,792
Due  after five
   years through 
   ten years           5,964,539         6,068,667          6,527,826         6,531,162    
Due  after ten
   years               1,667,245         1,757,913          1,961,495         2,038,301
-----------------------------------------------------------------------------------------

                   $  24,269,460        24,481,726         31,094,218        30,964,830
=========================================================================================
</TABLE>

                                                                     (Continued)
<PAGE>
                                       30


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


    (5)   Securities Available for Sale

          Securities  available  for sale at June 30,  1997  are  summarized  as
follows:
<TABLE>
<CAPTION>
                                                                 June 30, 1997
                                       ------------------------------------------------------------------
                                                              Gross          Gross
                                           Amortized       unrealized      unrealized       Approximate
                                             cost             gains          losses         market value
  -------------------------------------------------------------------------------------------------------
<S>                                  <C>                     <C>           <C>               <C>      
  Investment securities:
     U.S. Government agency
         bonds                       $     6,992,534          10,000        (21,284)          6,981,250
  -------------------------------------------------------------------------------------------------------

  Total investment securities        $     6,992,534          10,000        (21,284)          6,981,250
  =======================================================================================================

  Mortgage-backed and
  related securities:
         FHLMC certificates                8,143,694           9,939         (3,881)          8,149,752
  -------------------------------------------------------------------------------------------------------

  Total mortgage-backed and
     related securities              $     8,143,694           9,939         (3,881)          8,149,752
  =======================================================================================================
</TABLE>

          Proceeds from the sale of  securities  available  for sale  during the
              years ended June 30, 1997, 1996, and 1995, were $999,376,  $0, and
              $0, respectively. Gross realized gains from the sale of securities
              for the years ended June 30, 1997, 1996, and 1995 were $2,863, $0,
              and $0, respectively. There were no gross realized losses from the
              sale of securities  for the years ended June 30, 1997,  1996,  and
              1995.

          Accrued   interest   receivable  on  securities  available  for   sale
             aggregated $212,930 and $0 at June 30, 1997 and 1996, respectively.

          The carrying  amount  and  approximate   market  value  of  investment
              securities and  mortgage-backed  and related securities  available
              for sale at June 30, 1997 and 1996, by contractual  maturity,  are
              shown below:
<TABLE>
<CAPTION>
                            June 30, 1997                        June 30, 1996
                  ----------------------------------   ----------------------------------
                    Amortized        Approximate         Amortized        Approximate
                      cost           market value          cost           market value
-----------------------------------------------------------------------------------
<S>                <C>                <C>                    <C>               <C>
Due within one 
   year             $          0                0             0                 0
Due  after one
   year through
   five years          1,998,189        1,990,938             0                 0
Due after five
   years through
   ten years          13,138,039       13,140,064             0                 0
Due after ten
   years                       0                0             0                 0
-----------------------------------------------------------------------------------

                    $ 15,136,228       15,131,002             0                 0
===================================================================================
</TABLE>

          Nontaxable  interest  income  on  securities  available  for  sale and
              securities held to maturity was $67,546,  $60,213, and $10,380 for
              the years ended June 30, 1997, 1996, and 1995, respectively.

                                                                     (Continued)
<PAGE>
                                       31


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


    (6)   Loans Receivable

                                                      1997              1996  
         ---------------------------------------------------------------------
         
         Loans secured by real estate:
            Residential one-to-four family      $ 18,577,418        15,232,656
            Multifamily                              173,594           189,266
            Commercial                               679,968           519,543
            Agricultural                             150,000                 0
            Residential construction                 502,000           220,000
            Multifamily construction                 980,000                 0
                                                   
         Other consumer loans                         21,000           140,802
         Loans on deposits                           133,033           775,358
                                                   
         Commercial                                  714,869           775,358
         Agricultural  operating 
         line of credit                              425,000                 0
         ---------------------------------------------------------------------
         
                   Total                          22,356,882        17,077,625
         ---------------------------------------------------------------------
         
         Deferred  loan fees and discounts           (15,765)          (18,019)
         Loans in process                         (1,361,544)         (332,845)
         Allowance for losses                       (213,034)         (213,034)
         ---------------------------------------------------------------------
         
                   Net loans                    $ 20,766,539        16,513,727
         =====================================================================

          Accrued  interest  receivable  on loans  receivable  at June 30, 1997
              and 1996 was $125,682 and $101,364, respectively.

          The  following is a summary of  nonperforming  loans as of and for the
              years ended June 30:

                                                        1997        1996    1995
         -----------------------------------------------------------------------
         Impaired loans:
            Nonaccrual                                $    0           0       0
            Restructured                                   0           0       0
         -----------------------------------------------------------------------
                                                           0           0       0
         -----------------------------------------------------------------------
         
         Other nonperforming loans:
            Nonaccrual                                     0      89,153       0
            Restructured                                   0           0       0
         -----------------------------------------------------------------------
                                                           0      89,153       0
         -----------------------------------------------------------------------
                                      
                   Total nonperforming loans          $    0      89,153       0
         =======================================================================
         
         Scheduled interest under original terms           0       2,946       0
         Actual   interest recognized                      0           0       0
         -----------------------------------------------------------------------
         
                   Net interest lost 
                       on nonperforming loans         $    0       2,946       0
         =======================================================================

                                                                     (Continued)
<PAGE>
                                       32


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The average  balance of impaired loans during each of the fiscal years
              ended June 30, 1997 and 1996 was $13,520 and $0, respectively.

          There was no allowance  for losses on impaired  loans at June 30, 1997
and 1996.

          The aggregate  amount of loans to directors and executive  officers of
              the Company was  $231,803,  $237,177,  and  $254,139,  at June 30,
              1997, 1996, and 1995, respectively. Activity with respect to these
              loans during fiscal 1997 included loan originations of $33,000 and
              loan  repayments of $59,842.  Activity with respect to these loans
              during  fiscal  1996  included  loan  originations  of $0 and loan
              repayments  of $16,962.  Activity  with  respect to these loans in
              fiscal  1995  included  new  loans  of $0 and loan  repayments  of
              $17,618.  Such loans were made in the ordinary  course of business
              on   normal   credit   terms,    including   interest   rate   and
              collateralization,  and do not represent  more than normal risk of
              collection.

          Included in total  commitments to originate loans are fixed rate loans
              aggregating  $402,000  and  $751,400 as of June 30, 1997 and 1996,
              respectively.  The interest rates on these commitments ranged from
              8% to 9% for both June 30, 1997 and 1996.

          There were  no  material  commitments  to  lend  additional  funds  to
              customers  whose loans were  classified  as nonaccrual at June 30,
              1997.

          There were no loans at June 30, 1997 and 1996 which had terms modified
              in troubled debt restructurings.

          The Company   grants  loans  to  customers   who  live   primarily  in
              southwestern  Minnesota.  Although  the Company has a  diversified
              loan portfolio,  a substantial  portion of its debtors' ability to
              honor their contracts is dependent upon local economic conditions.

    (6)   Allowance for Losses on Loans Receivable

          Activity in the allowance for losses on loans receivable is summarized
as follows:

  Balance at June 30, 1994                                 $  213,034

      Provision for losses                                          0
      Charge-offs and recoveries                                    0
  -----------------------------------------------------------------------

  Balance at June 30, 1995                                    213,034

      Provision for losses                                          0
      Charge-offs and recoveries                                    0
  -----------------------------------------------------------------------

  Balance at June 30, 1996                                    213,034

      Provision for losses                                          0
      Charge-offs and recoveries                                    0
  -----------------------------------------------------------------------

  Balance at June 30, 1997                                 $  213,034
  =======================================================================

                                                                     (Continued)
<PAGE>
                                       33


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


    (7)   Real Estate

          Real estate owned, representing real estate expected to be acquired in
              settlement of loans,  totaled  $13,520 and $0 at June 30, 1997 and
              1996, respectively. The allowance for losses on real estate was $0
              at June 30, 1997 and 1996. There were no charge-offs,  recoveries,
              or provisions for losses for the years ended June 30, 1997,  1996,
              or 1995.

    (8)   Premises and Equipment

          A summary of premises  and  equipment  at June 30, 1997 and 1996 is as
              follows:

                                                 1997            1996
  ------------------------------------------------------------------------

  Land and office buildings                 $     310,927         155,476
  Furniture and equipment                         192,375         171,204
  ------------------------------------------------------------------------
                                                  503,302         326,680

  Less accumulated depreciation                  (291,235)       (274,493)
  ------------------------------------------------------------------------

                                            $     212,067          52,187
  ========================================================================

    (9)   Deposits

          Deposits and weighted-average interest rates at June 30 are summarized
              as follows:
<TABLE>
<CAPTION>
                                         1997                              1996              
                          ---------------------------       ------------------------------
                               Amount           Rate             Amount           Rate
------------------------------------------------------------------------------------------
                          
<S>                       <C>                   <C>         <C>                   <C>  
Passbook                  $       922,487       2.65%       $       985,658       2.65%
Money market accounts           7,187,340       4.23              7,104,387       3.89
-----------------------------------------                   ---------------
                                8,109,827                         8,090,045
-----------------------------------------                   ---------------
                          
Certificates of deposit:  
   4.01 - 5.00%                   421,418                         2,069,519
   5.01 - 6.00                 18,099,518                        16,334,358
   6.01 - 7.00                 18,749,835                        10,766,128
   7.01 - 8.00                    306,992                           598,235
-----------------------------------------                   --------------- 
                               37,577,763       5.83%            29,768,240       5.83%
-----------------------------------------                   ---------------
                          
Accrued interest payable          405,623                           184,244
-----------------------------------------                   ---------------
                          
                          $    46,093,213                   $    38,042,529
=========================================                   =============== 
</TABLE>
              
                                                                     (Continued)
<PAGE>
                                       34


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          Interest expense on deposits is summarized as follows:

                                   1997            1996           1995      
    -----------------------------------------------------------------------
                              
    Passbook                  $      25,130          33,968         30,978
    Money market accounts           275,769         196,842        214,906
    Certificates of deposit       1,846,365       1,652,027      1,437,363
    -----------------------------------------------------------------------
                              
                              $   2,147,264       1,882,837      1,683,247
    =======================================================================
                    
          Certificates of deposit had the following remaining maturities at June
              30:

                            1997                                1996
                ----------------------------    ------------------------------
                                   Weighted                        Weighted
                                   average                         average
                   Amount            rate          Amount            rate
------------------------------------------------------------------------------

0-6 months    $    16,655,355       5.70%     $    11,533,143       5.86%
7-12 months        11,031,181       5.84            6,857,760       5.72
13-36 months        9,174,681       6.04           10,852,065       5.84
Over 36 months        716,543       6.00              525,272       6.41
-----------------------------                 ---------------

              $    37,577,763       5.83%     $    29,768,240       5.83%
=============================                 ===============  

          The Company had  $13,909,498 and $9,698,164 of certificates of deposit
              with  balances  of  $100,000  or more at June 30,  1997 and  1996,
              respectively.

          At  June 30, 1997 investment securities and mortgage-backed securities
              with an  approximate  book value of  $20,353,000  were  pledged as
              collateral   for   certain   deposits,   including   approximately
              $17,969,000 of public deposits.

          At  June 30,  1997 and  1996,  the  aggregate  amount of  deposits  by
              directors and executive  officers  totaled  $322,029 and $234,298,
              respectively.  Such deposits were accepted in the ordinary  course
              of business with normal  interest rates,  interest  payment terms,
              and maturities.

                                                                     (Continued)
<PAGE>
                                       35


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


   (10)   Federal Home Loan Bank Advances

          The Company had no Federal Home Loan Bank (FHLB) advances  outstanding
              as of June 30, 1996. At June 30, 1997, the Company's FHLB advances
              consisted of the following:

  Year of maturity                                 Amount          Rate
  -------------------------------------------------------------------------

  1998                                        $     2,500,000       6.08%
  1999                                                      0       0.00
  2000                                              1,000,000       6.33
  ----------------------------------------------------------- 
                                                    3,500,000       6.15

  Open line of credit                                       0       0.00
  -----------------------------------------------------------       

                                              $     3,500,000       6.15%
  ===========================================================            

          At  June  30,  1997,  the  advances  and  open  line  of  credit  were
              collateralized  by the  Association's  FHLB stock and  investments
              with a carrying value of  approximately  $333,500 and  $7,423,851,
              respectively. The Company has a $1,000,000 line of credit with the
              FHLB which was not drawn on at June 30, 1997.  The Company has the
              ability to draw additional borrowings of approximately  $3,170,000
              based upon its  current  investment  in FHLB stock and  investment
              securities pledged.

   (11)   Income Taxes

          Income tax expense  (benefit)  for the years ended June 30 is composed
              of the following:

                                         1997          1996          1995    
       ---------------------------------------------------------------------
    
       Current:
           Federal                  $    141,694       120,844       140,579
           State                          51,828        43,942        46,860
       ---------------------------------------------------------------------
                 Total current           193,522       164,786       187,439
       ---------------------------------------------------------------------
    
       Deferred:
           Federal                       (43,066)       34,295        42,961
           State                         (13,788)       11,431        14,320
       ---------------------------------------------------------------------
                 Total deferred          (56,854)       45,726        57,281
       ---------------------------------------------------------------------
    
                                    $    136,668       210,512       244,720
       ===================================================================== 
    
                                                                     (Continued)
<PAGE>
                                       36


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The reasons for the difference  between the effective  income tax rate
              and the statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
                                                                             1997        1996       1995
        ---------------------------------------------------------------------------------------------------
<S>                                                                         <C>         <C>         <C>  
        Federal "expected" income tax rate                                  34.0%       34.0%       34.0%
        State income taxes, net of federal income tax benefit                6.5         6.5         6.7
        (Increase) decrease in base year tax bad debt reserve                0.0        (6.3)       (0.4)
        Tax-exempt interest income                                          (5.3)       (3.0)       (0.1)
        Other, net                                                           0.0         0.1         0.3
        ---------------------------------------------------------------------------------------------------

        Effective income tax rate                                           35.2%       31.3%       40.5%
        =================================================================================================== 
</TABLE>

          The tax  effects  of  temporary  differences  that  give  rise  to the
              deferred tax assets and deferred tax  liabilities at June 30, 1997
              and 1996 are as follows:

                                                             1997          1996
--------------------------------------------------------------------------------

Deferred tax assets:
   Discounts on mortgage-backed and  related securities     26,175        32,005
   Allowance  for losses on loans receivable                 2,651         2,651
   Unrealized loss on available for sale securities          2,090             0
   Other                                                         0         4,365
--------------------------------------------------------------------------------
          Gross deferred tax assets                         30,916        39,021

Valuation allowance                                              0             0
--------------------------------------------------------------------------------
          Deferred tax assets, net                          30,916        39,021

Deferred tax liabilities:
   Accrual to cash conversion                               95,564       159,421
   FHLB stock                                               50,500        50,478
   Premises and equipment                                   10,109        13,323
--------------------------------------------------------------------------------
          Gross deferred tax liabilities                   156,173       223,222
--------------------------------------------------------------------------------

          Net deferred tax liability                    $  125,257       184,201
================================================================================

          No  valuation  allowance  was required for deferred tax assets at June
              30, 1997 or 1996.

          Retained earnings at June 30, 1997 included  approximately  $1,155,957
              for which no provision for federal income tax has been made.  This
              amount represents allocations of income to bad debt deductions for
              tax  purposes.  Reduction of the amount so allocated  for purposes
              other than to absorb  losses will create  income for tax purposes,
              which  will be subject to the then  current  corporate  income tax
              rate.

          In  August 1996,  federal  legislation  was enacted that  repealed the
              favorable  bad debt  method  for  savings  and loan  associations.
              Subsequent to this repeal,  the Company continues to be subject to
              the   potential   tax   liability   to  the  extent   payments  or
              distributions of these appropriated earnings occurs.

                                                                     (Continued)
<PAGE>
                                       37


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


   (12)   Employee Benefits

          Retirement Plan

          The Company  has a defined  benefit  retirement  plan (the  Plan) that
              covers  substantially all full-time  employees.  The Plan provides
              for  retirement  benefits  beginning  at  age  65  based  on  each
              employee's  years of  qualifying  service  and the  average of the
              highest five consecutive annual salaries of the ten years prior to
              retirement.  The benefits are reduced by a specific  percentage of
              the employee's Social Security benefit. The Plan also provides for
              early  retirement  beginning  at  age  55  with  reduced  benefits
              determined  by using  an  early  retirement  factor.  An  employee
              becomes  fully vested upon  completion of five years of qualifying
              service.

          Net periodic  pension expense for the years ended June 30 includes the
              following components:
<TABLE>
<CAPTION>

                                                                               1997          1996           1995
                 ---------------------------------------------------------------------------------------------------

<S>                                                                       <C>                <C>            <C>   
                 Service cost--benefits earned during the period          $     28,076        26,494         26,927
                 Interest cost on projected benefit obligation                  57,824        51,730         48,474
                 Actual return on plan assets                                  (63,728)      (55,934)       (45,183)
                 Net amortization and deferral                                     438           438            907
                 ===================================================================================================

                 Net periodic pension expense                             $     22,610        22,728         31,125
                 ===================================================================================================
</TABLE>

          The weighted  average  discount  rate and rate of  increase  in future
              compensation level used in determining the actuarial present value
              of the projected  benefit  obligation  and the expected  long-term
              rate of return on assets were as follows:
<TABLE>
<CAPTION>

                                                                                    1997      1996      1995
            ---------------------------------------------------------------------------------------------------

<S>                                                                                 <C>       <C>        <C> 
            Discount rate                                                           7.5%      7.5%       7.5%
            Future compensation increase rate                                       6.0       6.0        6.0
            Long-term rate of return on assets                                      7.5       7.5        7.5
</TABLE>

                                                                     (Continued)
<PAGE>
                                       38


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The following  table  sets  forth the  Plan's  funded  status  and the
              amounts recognized in the Company's balance sheet at June 30:
<TABLE>
<CAPTION>
                                                                              1997          1996
----------------------------------------------------------------------------------------------------
<S>                                                                       <C>               <C>    
Actuarial present value of benefit obligations:
    Vested accumulated benefit obligation                                 $    676,571       624,568
    Nonvested accumulated benefit obligation                                       133            43
----------------------------------------------------------------------------------------------------
            Total accumulated benefit obligation                               676,704       624,611

Effect of projected future salary increases                                    137,234       104,247
----------------------------------------------------------------------------------------------------
            Projected benefit obligation                                       813,938       728,858

Plan assets at fair value                                                      889,838       780,740
----------------------------------------------------------------------------------------------------
            Plan assets in excess of projected
               benefit obligation                                               75,900        51,882

Unrecognized prior service cost                                                 15,875        17,638
Unrecognized gain from past experience
   different from that assumed                                                 (77,515)      (47,254)
Unrecognized net transition asset being
   amortized over 15 years                                                      (5,307)       (6,632)
----------------------------------------------------------------------------------------------------

            Prepaid pension cost                                          $      8,953        15,634
====================================================================================================
</TABLE>

          401(k) Plan

          All employees  are eligible to  participate  in the  Company's  401(k)
              plan.  Participating  employees may  contribute up to 15% of gross
              wages earned. Contributions to the Plan by the Company are made at
              the  discretion  of the board of  directors.  The Company  made no
              contributions to the Plan in 1997, 1996, or 1995.

          Employee Stock Ownership Plan

          Effective  July  7,  1995,  the  Company  adopted  an  Employee  Stock
              Ownership  Plan (the ESOP).  The ESOP  borrowed  $661,984 from the
              Company to purchase  82,748  shares of common stock of the Company
              on the date of the  conversion.  The Company  paid  principal  and
              interest  of $117,125  and  $123,086 to the ESOP during the fiscal
              year 1997 and 1996, respectively.

          As  the debt is repaid,  ESOP shares which were  initially  pledged as
              collateral for its debt are released from collateral and allocated
              to active employees,  based on the proportion of debt service paid
              in the year. The Company  accounts for its ESOP in accordance with
              Statement of Position  93-6,  Employers'  Accounting  for Employee
              Stock  Ownership  Plans.   Accordingly,   the  shares  pledged  as
              collateral  are reported as unearned ESOP shares in  stockholders'
              equity.  As shares  are  determined  to be ratably  released  from
              collateral,  the Company reports compensation expense equal to the
              current  market  price  of  the  shares,  and  the  shares  become
              outstanding for earnings per share computations. ESOP compensation
              expense  was  $84,650  and  $77,021 for fiscal year 1997 and 1996,
              respectively.

                                                                     (Continued)
<PAGE>
                                       39


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          All employees of the Company are eligible to  participate  in the ESOP
              after they attain age 21 and complete one year of service.

          A summary of the ESOP share  allocation is as follows for the calendar
              year ended:

                                                            1997         1996  
        -----------------------------------------------------------------------
        
        Shares allocated  beginning of year          $      4,140             0
        Shares allocated during year                        8,280         4,140
        Unreleased shares                                  70,328        78,608
        ----------------------------------------------------------------------- 
        
        Total ESOP shares                                  82,748        82,748
        =======================================================================
        
        Fair value of unreleased shares at June 30   $    694,974       688,829
        =======================================================================
        
          Management Stock Bonus Plan

          On  January 17, 1996,  stockholders  approved the Company's Management
              Stock Bonus Plan (MSBP),  which was subsequently  also approved by
              the Office of Thrift  Supervision (OTS). The plan provides for the
              grant of shares of stock to executive  employees  and directors of
              the  Company in the form of  restricted  stock,  which vest over a
              five  year  period  at the rate of 20% per  year.  Under the plan,
              45,000 shares of restricted  stock were granted.  Included in 1997
              and 1996 compensation and employee benefits expense is $86,625 and
              $39,703, respectively, related to the MSBP.

          Stock Option Plan

          On  January  17,  1996,  stockholders  of  the  Company  approved  the
              Company's  1995  Stock  Option  Plan.  The plan  was  subsequently
              approved by the OTS. The plan provides for the granting of options
              for the purpose of  attracting  and  retaining  key  personnel and
              facilitating  their  purchase of a stock  interest in the Company.
              The plan provided for the total  allocation of 112,500  options of
              which 92,500  options were granted to directors,  management,  and
              employees  of the  Company at an  exercise  price of  $9.8125  per
              share.  On April 9, 1997, the Company granted 5,400 options of the
              remaining  unawarded  options at an exercise  price of $11.375 per
              share. All options granted under this plan vest pro rata over five
              years  from the  grant  date.  In  addition,  vested  options  are
              exercisable for a period ending 10 years after the grant date.

                                                                     (Continued)
<PAGE>
                                       40


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          As  of June  30,  1997,  no  stock  options  have  been  exercised  or
              forfeited.  A summary of stock  option  activity  is  detailed  as
              follows:
<TABLE>
<CAPTION>
                                                                              Weighted
                                             Options                          average
                                            available        Options          exercise
                                            for grant      outstanding         price
-----------------------------------------------------------------------------------------
<S>                                            <C>              <C>          <C>       
June 30, 1995                                        0               0                 0
1995 stock option plan adopted                 112,500               0                 0
Granted  January  17,  1996  (weighted
   average fair value $4.34 per option)        (92,500)         92,500       $   9.8125
-----------------------------------------------------------------------------------------

June 30, 1996                                   20,000          92,500           9.8125
Granted April 9, 1997 (weighted average
   fair value $5.74 per option)                 (5,400)          5,400          11.3750
-----------------------------------------------------------------------------------------

June 30, 1997                                   14,600          97,900           9.8987
</TABLE>

          The number of options exerciseable at June 30, 1997 was 18,500 options
              with a weighted  average exercise price of $9.8125.

          The Company  uses the  intrinsic  value  method  as  described  in APB
              Opinion  No. 25 and  related  interpretations  to account  for its
              stock option plans.  Accordingly,  no  compensation  cost has been
              recognized  for the  plans.  There are no  charges  or  credits to
              expense with respect to the granting or exercise of options  since
              the  options  were  issued at fair value on the  respective  grant
              dates. Had  compensation  cost for the 1995 Stock Option Plan been
              determined  based on the fair value method as  established in SFAS
              No. 123,  the  Company's  net income and  earnings per share would
              have been  reduced to the pro forma  amounts as  indicated  in the
              following table:
<TABLE>
<CAPTION>
                                                                                 Fiscal Year Ending
                                                                        June 30, 1997         June 30, 1996
            ---------------------------------------------------------------------------------------------------
<S>                                                                        <C>                    <C>       
            Net Income:
                As reported                                                $  251,500             $  462,432
                Pro forma                                                     202,396                442,360
            Earnings per common share
                and common share equivalent:
                    As reported                                                  0.26                   0.45
                    Pro forma                                                    0.21                   0.43
</TABLE>

          The above  disclosed  pro forma  effects of  applying  SFAS No. 123 to
              compensation  costs may not be  representative  of the  effects on
              reported pro forma net income for future years.

                                                                     (Continued)
<PAGE>
                                       41


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The fair  value  for  each  option  granted  is  estimated  based on a
              Black-Scholes  option pricing model.  The model  incorporates  the
              following weighted average assumptions:
<TABLE>
<CAPTION>
                                                    For options granted in accordance with
                                                            1995 Stock Option Plan
                                                      granted in the fiscal year ending
                                                     June 30, 1997         June 30, 1996
-----------------------------------------------------------------------------------------------

<S>                                                       <C>                   <C>  
Risk-free interest rate                                   7.07%                 5.78%
Expected life                                             10 years              10 years
Expected volatility                                       12.00%                12.00%
Expected dividends                                        None                  None
</TABLE>

          On  June 10, 1997,  the Company  approved a stock option plan to grant
              38,472  options to its  executive  officers  and  directors  at an
              exercise  price of  $11.0625  per share on August 1,  1997.  These
              stock  options are  exercisable  at grant date in full  commencing
              August 1, 1997,  through a period no later than 10 years after the
              grant  date.  For  purposes of  disclosing  the effect of the 1997
              Stock Option Plan in pro forma earnings  statements as required by
              SFAS No. 123, the compensation costs of this plan will effect only
              pro forma net income  and  earnings  per share in the fiscal  year
              ended June 30, 1998.

   (13)   Retained Earnings and Regulatory Capital

          The Association,  as a member of the Federal Home Loan Bank System, is
              required  to hold a specified  number of shares of capital  stock,
              which is carried  at cost,  in the  Federal  Home Loan Bank of Des
              Moines. In addition,  the Association is required to maintain cash
              and other  liquid  assets in an amount  equal to 5% of its deposit
              accounts  and  other   obligations   due  within  one  year.   The
              Association has met these requirements.

          The Association is subject to various regulatory capital  requirements
              administered  by the  federal  banking  agencies.  Failure to meet
              minimum capital  requirements can initiate certain  mandatory--and
              possibly additional  discretionary--actions by regulators that, if
              undertaken,   could   have  a  direct   material   effect  on  the
              Association's   financial   statements.   Under  capital  adequacy
              guidelines  and the  regulatory  framework  for prompt  corrective
              action, the Association must meet specific capital guidelines that
              involve  quantitative   measures  of  the  Association's   assets,
              liabilities  and certain  off-balance  sheet  items as  calculated
              under regulatory accounting  practices.  The Association's capital
              amounts  and   classification  are  also  subject  to  qualitative
              judgments by the regulators about components,  risk weightings and
              other factors.

          Quantitative  measures  established  by regulation  to ensure  capital
              adequacy  require the Association to maintain  minimum amounts and
              ratios (set forth in the  following  table) of Tangible,  Core and
              Risk-based capital (as defined in the regulations) to total assets
              (as defined).  Management believes,  as of June 30, 1997, that the
              Association meets all capital adequacy requirements to which it is
              subject.

          As  of June  30,  1997,  the  most  recent  notification  from the OTS
              categorized  the  Company  as  `well  capitalized.'  There  are no
              conditions  or events  since  that  notification  that  management
              believes have changed the Company's category.

                                                                     (Continued)
<PAGE>
                                       42


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The Association's actual capital amounts and ratios are also presented
              in the table (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                                            To be Well
                                                                                                         Capitalized Under
                                                                                                         Prompt Corrective
                                                                                                        Actions Provisions
                                 Actual                 Requirement               Excess Capital
                          ----------------------    ---------------------    -------------------------  --------------------
                                        Percent                 Percent                  Percent                   Percent
                                          of                      of                        of                       of
                           Amount      assets        Amount     assets        Amount      assets        Amount     assets(1)
                                         (1)                      (1)                      (1)
     -----------------------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>       <C>              <C>      <C>             <C>      <C>             <C>   
     Association's
        net worth (3)   $    8,391

     Add back:
        AFS market
        valuation                3

     Tangible capital        8,394      13.91%   $      905        1.50%   $   7,489       12.41%          N/A       N/A
                          ---------

     Core capital (2)        8,394      13.91         1,811        3.00        6,583       10.91         3,018       5.00%
                          ---------

     Plus:
        Allowable
            portion of
            general
            allowance
            for loan
            losses             213
                          ---------

     Risk-based
        capital         $    8,607      44.76%   $    1,538        8.00%   $   7,069       36.76%   $    1,923      10.00%
                          =========

</TABLE>

     (1)   Based on the  Association's  adjusted total assets for the purpose of
           the tangible and core capital ratios and risk-weighted assets for the
           purpose of the risk-based capital ratio.

     (2)   Pursuant to Prompt Corrective Action regulations,  the Association is
           also  required to hold core capital equal to or greater than 6.00% of
           its risk-weighted assets, or $1,154 at June 30, 1997.

     (3)   The   Association's   net  worth  excludes  $18,000  in  post  period
           adjustments  reportable  in  subsequent  periods in  accordance  with
           regulatory capital instructions.

   (14)   Recent Legislation and Regulatory Developments

          The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September
              30, 1996.  DIFA  addressed the  inadequate  funding of the Savings
              Association  Insurance Fund (SAIF).  In order to recapitalize  the
              SAIF,   DIFA   imposed  a  one-time   assessment   on  all  thrift
              institutions.  The  Bank's  assessment  was  a  pretax  charge  of
              $237,085 and was recognized in the first quarter of fiscal 1997.

                                                                     (Continued)
<PAGE>
                                       43


                                      REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          DIFA also addressed the funding for the Financing  Corp. (FICO) bonds.
              Thrifts  will  pay 6.4  basis  points  per $100 of  deposits  from
              January 1, 1997 to December 31,  1999.  From January 1, 2000 until
              the FICO bonds are retired in 2019,  the  estimated  assessment to
              retire the FICO bonds is expected to be 2.5 basis  points per $100
              of deposits.

          DIFA proposed  that the Bank  Insurance Fund (BISF) and SAIF be merged
              on January 1, 1999, provided no insurance  depository  institution
              is a savings  association  on that date.  DIFA also  directed  the
              Secretary of the Treasury to present  recommendations  to Congress
              for establishment of a common depository institution charter.

   (15)   Stock Repurchases

          During the fiscal  year ended June 30,  1997,  the  Company  purchased
              106,875 shares of its outstanding common stock at an average price
              of $11.48 per share, or 10% of its previously  outstanding  common
              stock.  For the  fiscal  year  ended June 30,  1996,  the  Company
              repurchased  101,250 shares,  including 45,000 shares allocated to
              the management  recognition plan, at an average price of $9.53 per
              share. As a result of the stock  repurchase  program,  the Company
              has now outstanding  961,875 shares of common stock. The following
              summarizes  the  Company's  common  stock  repurchases  during the
              fiscal year:

                                             Shares          Price      
        Date Purchased                     Purchased       per share
        ---------------------------------------------------------------
        
        January 15, 1997                        3,000        $ 10.3750
        January 28, 1997                        4,600          10.7500
        January 30, 1997                          600          11.0000
        January 31, 1997                       10,000          11.0000
        February 4, 1997                       37,500          11.0000
        February 19, 1997                      51,175          12.0625

          Repurchased shares are considered treasury shares and will be utilized
              for general  corporate and other purposes,  including the issuance
              of shares in connection  with stock option plans,  the  management
              stock bonus plan, and other purposes.

   (16)   Financial Instruments With Off-Balance-Sheet Risk

          The Company is a party to financial instruments with off-balance-sheet
              risk in the normal course of business to meet the financing  needs
              of its customers.  These financial instruments include commitments
              to extend credit.  These instruments  involve, to varying degrees,
              elements of credit and interest  rate risk in excess of the amount
              recognized  in  the  accompanying  balance  sheets.  The  contract
              amounts of these instruments  reflect the extent of involvement by
              the Company.

          The Company's  exposure to credit loss in the event of  nonperformance
              by the other party to the financial  instrument for commitments to
              extend  credit  is  represented  by the  contract  amount of these
              commitments.  The Company uses the same credit  policies in making
              commitments as it does for on-balance-sheet instruments.

                                                                     (Continued)
<PAGE>
                                       44


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The contract  amount of these  financial  instruments at June 30, 1997
              and 1996 is as follows:

                                                          Contract amount      
                                                  ---------------------------
                                                       1997          1996
-----------------------------------------------------------------------------

Financial instruments whose contract amount
    represents risk:
       Commitments to extend credit               $   402,000       751,400
=============================================================================

          Commitments  to extend  credit  are  agreements  to lend to a customer
              provided there is no violation of any condition established in the
              contract.  Commitments  generally have fixed  expiration  dates or
              other termination  clauses and may require payment of a fee. Since
              a portion of the  commitments may expire without being drawn upon,
              the total commitment amount does not necessarily  represent future
              cash   requirements.   The  Company   evaluates  each   customer's
              creditworthiness on a case-by-case basis. The amount of collateral
              obtained,  if deemed  necessary by the Company  upon  extension of
              credit,  is based on the loan type and on management's  evaluation
              of the borrower. Collateral consists primarily of residential real
              estate and personal property.

   (17)   Fair Value of Financial Instruments

          SFAS No. 107, Disclosures about Fair Values of Financial  Instruments,
              requires  disclosure  of  estimated  fair values of the  Company's
              financial   instruments,   including  assets,   liabilities,   and
              off-balance  sheet items for which it is  practicable  to estimate
              fair value.  The fair value estimates are made as of June 30, 1997
              and 1996,  based upon relevant market  information,  if available,
              and  upon  the   characteristics  of  the  financial   instruments
              themselves.  Because no market exists for a significant portion of
              the  Company's  financial  instruments,  fair value  estimates are
              based upon judgments  regarding  future expected loss  experience,
              current  economic  conditions,  risk  characteristics  of  various
              financial  instruments,  and  other  factors.  The  estimates  are
              subjective  in nature and  involve  uncertainties  and  matters of
              significant  judgment  and  therefore  cannot be  determined  with
              precision.  Changes in assumptions could significantly  affect the
              estimates.

          Fair value estimates are based only on existing  financial instruments
              without  attempting  to estimate the value of  anticipated  future
              business  or the  value of  assets  and  liabilities  that are not
              considered   financial   instruments.   In   addition,   the   tax
              ramifications  related to the realization of the unrealized  gains
              and  losses  can  have a  significant  effect  on the  fair  value
              estimates and have not been considered in any of the estimates.

                                                                     (Continued)
<PAGE>
                                       45


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          The estimated fair value of the Company's  financial  instruments  are
              shown below.  Following the table,  there is an explanation of the
              methods and  assumptions  used to estimate  the fair value of each
              class of financial instruments.
<TABLE>
<CAPTION>
                                                                                  June 30
                                        ------------------------------------------------------------------------------------------
                                                             1997                                          1996
                                        --------------------------------------------  --------------------------------------------
                                            Carrying        Estimated      Contract       Carrying        Estimated      Contract
                                             amount        fair value       amount         amount        fair value       amount
        --------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>              <C>          <C>             <C>              <C>
        Financial assets:
           Cash and cash
               equivalents               $    763,792         763,792                     2,873,163       2,873,163
           Securities held to
               maturity                    24,269,460      24,481,726                    31,094,218      30,964,830
           Securities available
               for sale                    15,131,002      15,131,002                             0               0
           Loans receivable, net           20,766,539      21,248,657                    16,513,727      16,949,767
           Stock in Federal Home
               Loan Bank of
               Des Moines, at cost            333,500         333,500                       333,500         333,500
           Accrued interest
               receivable                     613,357         613,357                       553,856         553,856

        Financial liabilities:
           Deposits                        45,687,590      45,864,695                    37,858,285      38,010,952
           Federal Home Loan
        Bank advances                       3,500,000       3,496,847                             0               0
           Accrued interest payable           405,623         405,623                       184,244         184,244

        Off-balance sheet 
           financial instruments:
               Commitments to
                  extend credit                     0           8,479       402,000               0          13,466       751,400
</TABLE>

          Cash and Cash Equivalents

          The carrying amount of cash and cash  equivalents  approximates  their
              fair value.

          Securities Held to Maturity and Securities Available for Sale

          The fair  values  of  securities   held  to  maturity  and  securities
              available for sale are based upon quoted market prices.

                                                                     (Continued)
<PAGE>
                                       46


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          Loans Receivable, Net

          The fair value of the loan receivable portfolio, with the exception of
              the 1 to 4 family  adjustable rate mortgage loan portfolio and the
              consumer,  agriculture,  commercial  and  commercial  real  estate
              portfolios,  was calculated by comparison of the loan portfolio to
              observed  secondary  market  prices for loans and  mortgage-backed
              securities with similar characteristics. For consumer, commercial,
              and commercial real estate loans, the fair value was calculated by
              discounting   the  scheduled  cash  flows  through  the  estimated
              maturity using  anticipated  prepayment  speeds and using discount
              rates that reflect  credit and interest rate risk inherent in each
              loan  portfolio.  The fair  value of the 1 to 4 family  adjustable
              rate  mortgage loan  portfolio  was  estimated  using the carrying
              value  of  the  portfolio  due  to  its  repricing  frequency  and
              comparison  to  observed   secondary  market  loans  with  similar
              characteristics.

          Stock in Federal Home Loan Bank of Des Moines, at Cost

          The carrying amount of FHLB stock approximates its fair value.

          Accrued Interest Receivable

          The carrying amount of accrued  interest  receivable  approximates its
              fair value since it is  short-term  in nature and does not present
              unanticipated credit concerns.

          Deposits

          Under SFAS No. 107, the fair value of deposits with no stated maturity
              such as savings and money market accounts,  is equal to the amount
              payable on demand.  The fair value of  certificates  of deposit is
              based on the discounted  value of contractual  cash flows using as
              discount  rates the rates that were  offered by the  Company as of
              June 30, 1997 and 1996 for deposits with maturities similar to the
              remaining maturities of the existing certificates of deposit.

          The fair value estimate for deposits does not include the benefit that
              results  from  the low  cost  funding  provided  by the  Company's
              existing deposits and long-term customer relationships compared to
              the cost of obtaining  different sources of funding.  This benefit
              is commonly referred to as the core deposit intangible.

          Federal Home Loan Bank Advances

          The fair value of FHLB advances is based upon the discounted  value of
              contractual  cash flows using as discount  rates the rates offered
              by the FHLB on advances with  maturities  similar to the remaining
              maturities of the existing advances.

          Accrued Interest Payable

          The carrying amount of accrued interest payable  approximates its fair
              value since it is short-term in nature.

                                                                     (Continued)


<PAGE>
                                       47


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


          Commitments to Extend Credit

          The fair value of commitments  to extend credit is estimated  based on
              comparison  of the  committed  rate to observed  secondary  market
              rates and prices and adjusted for expected fallout.

   (18)   Stock Conversion

          The Association  converted from a  federally-chartered  mutual savings
              and loan  association to a  federally-chartered  stock savings and
              loan  association   pursuant  to  its  Plan  of  Conversion.   The
              conversion  was  effected  on July 7, 1995,  and  resulted  in the
              issuance of 1,125,000  shares of common stock (par value $0.10) at
              $8.00 per  share  for a gross  sales  price of  $9,000,000.  Costs
              related  to  conversion   (primarily   underwriters'   commission,
              printing,  and  professional  fees)  aggregated  $450,639 and were
              deducted to arrive at the net proceeds of $8,549,361.  The Company
              established  an employee  stock  ownership  trust which  purchased
              82,748 shares of common stock of the Company at the issuance price
              of $8.00 per share from funds borrowed from the Company.

          Funds held for stock  subscriptions  in excess of common  stock issued
              were refunded to the subscribers at the time of conversion .

          Subsequent to conversion, savings account holders and borrowers do not
              have  voting  rights  in the  Association.  Voting  rights  of the
              Association are vested exclusively with the Company.

          For the  purpose of granting  eligible  members of the  Association  a
              priority in the event of future liquidation,  the Association,  at
              the time of conversion, established a liquidation account equal to
              its regulatory  capital as of December 31, 1994. In the event (and
              only  in  such  event)  of  future  liquidation  of the  converted
              Association,  an eligible savings  accountholder  who continues to
              maintain  a  savings  account  shall  be  entitled  to  receive  a
              distribution  from the liquidation  account,  in the proportionate
              amount  of  the  then-current  adjusted  balance  of  the  savings
              deposits  then  held,  before any  distributions  may be made with
              respect to capital stock.

          Present  regulations  provide that the  Association may not declare or
              pay a cash dividend on or  repurchase  any of its capital stock if
              the result  thereof would be to reduce the  regulatory  capital of
              the  Association  below the amount  required  for the  liquidation
              account  or  the  regulatory  capital  requirement.  Further,  any
              dividend  declared or paid on, or repurchase of, the Association's
              capital  stock  shall  be  in   compliance   with  the  rules  and
              regulations of the OTS, or other applicable regulations.

   (19)   Redwood Financial, Inc. Financial Information (Parent Company Only)

          The parent  company's  principal  assets  are  its  investment  in the
              Association  and  securities.  The  following  are  the  condensed
              financial statements for the parent company only as of and for the
              year ended June 30, 1997 and 1996.

                                                                     (Continued)
<PAGE>
                                       48


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

        Condensed Balance Sheet
<TABLE>
<CAPTION>

                                                                               June 30,         June 30,
                             Assets                                             1997             1996 
--------------------------------------------------------------------------------------------------------

<S>                                                                        <C>              <C>    
        Cash and cash equivalents                                          $  2,122,649         101,019
        Securities held to maturity                                           1,274,607       2,488,579
        Loans receivable, net                                                   500,269         475,358
        Investment in subsidiary                                              8,372,837      10,040,701
        Accrued interest receivable                                              35,479          66,784
        Other assets                                                             36,192               0
--------------------------------------------------------------------------------------------------------
                        Total assets                                       $ 12,342,033      13,172,441
========================================================================================================

                     Liabilities and Stockholders Equity
--------------------------------------------------------------------------------------------------------

        Accrued expenses and other liabilities                                        0          15,405
--------------------------------------------------------------------------------------------------------
                        Total liabilities                                             0          15,405
--------------------------------------------------------------------------------------------------------

        Common stock                                                            112,500         112,500
        Additional paid-in capital                                            8,467,833       8,457,017
        Retained earnings, subject to certain restrictions                    6,369,591       6,118,091
        Unearned employee stock ownership plan shares                          (529,504)       (595,744)
        Net unrealized loss on securities available for sale                     (3,135)              0
        Unearned management stock bonus plan shares                            (306,797)       (393,422)
        Treasury stock, at cost                                              (1,768,455)       (541,406)
--------------------------------------------------------------------------------------------------------
                        Total stockholders equity                            12,342,033      13,157,036
--------------------------------------------------------------------------------------------------------
                        Total liabilities and stockholders equity          $ 12,342,033      13,172,441
========================================================================================================
</TABLE>

        Condensed Statement of Income
<TABLE>
<CAPTION>

                                                                                 1997            1996 
--------------------------------------------------------------------------------------------------------

<S>                                                                        <C>                 <C>
        Gain on sale of investments available for sale                     $      2,863               0
        Interest income                                                         201,007         200,739
        Equity in earnings of subsidiary                                        335,271         433,884
        Compensation and employee benefits                                     (171,275)       (116,725)
        Other                                                                  (193,533)        (62,936)
--------------------------------------------------------------------------------------------------------
                        Earnings before income tax benefit                      174,333         454,962

        Income tax benefit                                                       77,167           7,470
--------------------------------------------------------------------------------------------------------
                        Net earnings                                       $    251,500         462,432
========================================================================================================
</TABLE>
                                                                     (Continued)


<PAGE>
                                       49


                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


        Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
                                                                                                          12 months ended   
                                                                                                              June 30,     
                                                                                                  ----------------------------
                                                                                                         1997          1996   
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>             <C>    
        Operating activities:
                Net earnings                                                                       $   251,500        462,432
                Adjustments to reconcile net earnings to cash
                        provided by operating activities:
                                Equity in earnings of subsidiary                                      (335,271)      (433,884)
                                Amortization of premiums (discounts), net                               (1,028)        (1,092)
                                (Increase) decrease in accrued interest receivable                      31,305        (66,784)
                                Gain on sale of investments available for sale                          (2,863)             0
                                Amortization of unearned ESOP shares                                    66,240         66,240
                                Earned ESOP priced above original cost                                  10,816         10,781
                                Earned management stock bonus plan shares                               86,625         39,703
                                Increase (decrease) in accrued expenses and
                                        other liabilities                                              (15,405)        15,405
                                Increase in other assets                                               (36,192)        (7,470)
-----------------------------------------------------------------------------------------------------------------------------
                                         Net cash provided by operating activities                      55,727         85,331
-----------------------------------------------------------------------------------------------------------------------------

        Investing activities:
                Proceeds from maturities of investment securities
                        held to maturity                                                             1,215,000              0
                Purchases of investment securities available for sale                                 (996,513)    (2,487,487)
                Proceeds from sales of investment securities available for sale                        999,376              0
                Increase in loans receivable, net                                                      (24,911)      (475,358)
-----------------------------------------------------------------------------------------------------------------------------
                                         Net cash provided (used) by investing activities            1,192,952     (2,962,845)
-----------------------------------------------------------------------------------------------------------------------------

        Financing activities:
                Adoption of ESOP                                                                             0       (661,984)
                Dividend from Association                                                            2,000,000              0
                Proceeds from sale of common stock                                                           0      8,549,361
                Repurchase of common stock                                                          (1,227,049)      (965,156)
                Purchase of Association stock                                                                0     (3,943,688)
-----------------------------------------------------------------------------------------------------------------------------
                                         Net cash provided by financing activities                     772,951      2,978,533
-----------------------------------------------------------------------------------------------------------------------------

                                         Increase in cash and cash equivalents                       2,021,630        101,019

        Cash and cash equivalents, beginning of year                                                   101,019              0
-----------------------------------------------------------------------------------------------------------------------------

        Cash and cash equivalents, end of year                                                     $ 2,122,649        101,019
=============================================================================================================================
</TABLE>

                                                                     (Continued)
<PAGE>
                                       50

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


(20)    Quarterly Financial Data (Unaudited) 

        Summarized quarterly financial data for fiscal 1997 are as follows:
<TABLE>
<CAPTION>
                                                                     Three months ended      
                                                   -----------------------------------------------------
                                                     June 30,     March 31,   December 31, September 30,     
Selected Operations Data                               1997         1997         1996         1996 
--------------------------------------------------------------------------------------------------------

<S>                                                <C>            <C>          <C>          <C>    
Interest income                                    $1,078,635      972,178      909,043      909,761
Interest expense                                      623,269      553,189      502,095      507,196
--------------------------------------------------------------------------------------------------------
                Net interest income                   455,366      418,989      406,948      402,565

Provision for loan losses                                   0            0            0            0
Non-interest income                                    13,910       14,923       12,712       14,933
Non-interest expense                                  258,223      232,074      366,713      495,168
Income tax expense (benefit)                           84,566       74,986       17,239      (40,123)
--------------------------------------------------------------------------------------------------------

                Net earnings (loss)                $  126,487      126,852       35,708      (37,547)
========================================================================================================
Earnings per common share                          $      .13          .13          .04         (.04)

</TABLE>
<TABLE>
<CAPTION>
                                                                     Three months ended      
                                                   -----------------------------------------------------
                                                     June 30,     March 31,   December 31, September 30,     
Selected Operations Data                                 1996         1996         1995         1995 
--------------------------------------------------------------------------------------------------------

<S>                                                <C>            <C>          <C>          <C>    
Interest income                                    $  888,592      860,909      864,851      872,799
Interest expense                                      470,402      474,621      463,819      473,995
--------------------------------------------------------------------------------------------------------
                Net interest income                   418,190      386,288      401,032      398,804

Provision for loan losses                                   0            0            0            0
Non-interest income                                    12,395       14,681       17,867       15,568
Non-interest expense                                  259,503      238,277      289,247      204,854
Income tax expense                                     59,608       60,328       54,496       36,080
--------------------------------------------------------------------------------------------------------

                Net earnings                       $  111,474      102,364       75,156      173,438
======================================================================================================

Earnings per common share                          $      .11          .10          .07          .17
</TABLE>
                                                                     (Continued)
<PAGE>
                                       51

                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY


Selected Financial       June 30,     March 31,   December 31,  September 30,
Condition Data             1997          1997          1996          1996
-----------------------------------------------------------------------------

Total assets          $62,168,916    55,730,838    53,526,359    51,058,275
Securities             39,400,462    35,592,367    26,318,389    30,081,878
Net loans              20,766,539    18,878,902    18,171,579    17,229,712
Deposits               46,093,213    42,561,895    40,077,112    37,410,421
Stockholders equity    12,342,033    12,109,742    13,238,271    13,160,293

Selected Financial       June 30,     March 31,   December 31,  September 30,
Condition Data             1996          1996          1995          1995 
-----------------------------------------------------------------------------

Total assets          $51,514,643    50,697,495    48,686,408    48,495,677
Securities             31,094,218    27,572,272    29,854,684    29,294,283
Net loans              16,513,727    15,883,903    15,307,707    15,368,895
Deposits               38,042,529    37,371,536    34,633,047    34,488,104
Stockholders equity    13,157,036    13,004,368    13,830,097    13,735,104

 
                                                               

<PAGE>

                                       52

                                CORPORATE OFFICE
                             Redwood Financial, Inc.
                    301 South Washington Street, P.O. Box 317
                       Redwood Falls, Minnesota 56283-0317


                  Board of Directors of Redwood Financial, Inc.

 James P. Tersteeg, Grocer, Owner--       J. Scott Nelson, Doctor of Pharmacy,
    Tersteeg's Inc.                          Sward-Kemp Drug, Inc.
 Paul W. Pryor, Executive Officer        Donald C. Orth, Executive Officer
 Blaine C. Farnberg, Retired             Thomas W. Stotesbery, Certified Public
                                             Accountant



                  Executive Officers of Redwood Financial, Inc.

    Paul W. Pryor                                            Donald C. Orth
    President and Chief Executive Officer                    Vice President

                                   Tony Acker
                             Chief Financial Officer

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


 Corporate Counsel:                       Independent Auditors:
 Ebbesen & Sarrazin                       KPMG Peat Marwick LLP
    301 East Third Street                     4200 Norwest Center
    Redwood Falls, Minnesota 56283-0127       90 South 7th Street
                                              Minneapolis, Minnesota 55402

 Special Counsel:                         Transfer Agent and Registrar:
 Malizia, Spidi, Sloane & Fisch, P.C.     American Securities Transfer, Inc.
    One Franklin Square                       1825 Lawrence Street, Suite 444
    1301 K Street, N.W., Suite 700 East       Denver, Colorado 80202-1817
    Washington, D.C. 20005

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


The  Company's  Annual  Report for the Year  Ended June 30,  1997 filed with the
Securities  and Exchange  Commission on Form 10-KSB is available  without charge
upon  written  request.  For a copy of the Form  10-KSB  or any  other  investor
information, please write or call the Secretary of the Company, at the Company's
corporate office in Redwood Falls, Minnesota. The annual meeting of stockholders
will be held on October  30,  1997 at 10:00 a.m. at the office of the Company at
301 South Washington Street, Redwood Falls, Minnesota.