EXHIBIT 13



<PAGE>



                [REDWOOD FINANCIAL, INC. LETTER TO STOCKHOLDERS]



<PAGE>



           [REDWOOD FINANCIAL, INC. LETTER TO STOCKHOLDERS CONTINUED]



<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                  Consolidated Financial Statements

                  June 30, 1998, 1997, and 1996

<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY



TABLE OF CONTENTS

--------------------------------------------------------------------------------
 
                                                                         Page(s)

Independent Auditors' Report.......................................        1

Annual Report......................................................      2-19

Financial Statements:

     Consolidated Balance Sheets...................................       20

     Consolidated Statements of Earnings...........................       21

     Consolidated Statements of Stockholders' Equity...............       22

     Consolidated Statements of Cash Flows.........................      23-24

Notes to Financial Statements......................................      25-54


<PAGE>










                          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, 1998 and 1997 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, 1998. 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,  1998 and  1997,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended June 30, 1998 in conformity with generally accepted accounting principles.



                              /s/KPMG Peat Marwick LLP

Minneapolis, Minnesota
July 31, 1998, except for note 21,
    which is as of September 15, 1998

                                        1


<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

June 30, 1998
--------------------------------------------------------------------------------

Profile and Related Information

Redwood Financial,  Inc. (the Company) is a Minnesota  corporation  organized at
the direction of the Board of Directors of the HomeTown Bank (the Bank, formerly
Redwood  Falls  Federal  Savings  and Loan  Association)  to acquire  all of the
capital stock that the Bank 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 Bank 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 Bank,  but utilizes
the support staff of the Bank from time to time.

The  Bank  is  a  federally   chartered  mutual  savings  and  loan  association
headquartered in Redwood Falls, Minnesota. The Bank has two full-service offices
located in Redwood and  Renville  Counties,  Minnesota.  The Bank was founded in
1924 and  obtained  its  current  name in 1998.  The Bank'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 Bank is a member of the Federal Home Loan Bank (FHLB) System. The Bank
is  a  community-oriented,   retail  savings  institution  offering  traditional
mortgage  loan  products.  It is the  Bank's  intent to  remain  an  independent
community  savings  and loan  association  serving  the local  banking  needs of
Redwood and Renville Counties, Minnesota.

The Bank attracts  deposits from the public and uses such deposits  primarily to
invest  in  residential  lending  on  owner-occupied  properties.  The Bank also
originates consumer, commercial, and agricultural 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 1998:
   First Quarter                                $ 11 1/8            10 3/4
   Second Quarter                                 12 1/2            11 1/8
   Third Quarter                                  13 1/4            12 1/2
   Fourth Quarter                                 14 1/2            13

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

The number of  stockholders  of record of common stock as of June 30, 1998,  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, 1998, there were 868,093 shares outstanding.

                                       2

                                                                     (Continued)
<PAGE>


REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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

                      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 the HomeTown Bank.

The  Bank  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.
The  principal  business of the Company  through the Bank  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 securities, and municipal
bonds.  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 Bank, 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 Bank'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,  1998,  1997,  and 1996.  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.

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.

                                                                     (Continued)

                                       3
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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

The Company paid no dividends to holders of common stock during the fiscal years
ended June 30, 1998 and 1997.

The  Companys  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 Companys ability to pay dividends is dependent,
     in part,  upon the  dividends it receives  from the Bank.  The Bank may not
     declare or pay a cash  dividend  on any of its stock if the effect  thereof
     would cause the Banks regulatory capital to be reduced below (1) the amount
     required for the  liquidation  account  established in connection  with the
     Banks  conversion  from mutual stock form,  or (2) the  regulatory  capital
     requirements imposed by the Office of Thrift Supervision (OTS).
<TABLE>
<CAPTION>
                      FIVE-YEAR SELECTED FINANCIAL SUMMARY
                  (dollars in thousands, except per share data)

                                                                                        Year ended June 30
                                                                        ----------------------------------------------------
                                                                         1998       1997       1996       1995       1994
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>      <C>        <C>        <C>  
Operating results:
   Interest income                                                    $   4,748      3,870      3,487      3,023      3,048
   Interest expense                                                       2,999      2,186      1,883      1,683      1,448
----------------------------------------------------------------------------------------------------------------------------

   Net interest income                                                    1,749      1,684      1,604      1,340      1,600

   Provision for loan losses                                                 38          -          -          -          1
   Noninterest income                                                       131         57         61         40         54
   Noninterest expense                                                    1,174      1,352        992        775        690
   Income tax expense                                                       243        137        211        245        426
----------------------------------------------------------------------------------------------------------------------------

   Earnings before cumulative effect of accounting change                   425        252        462        360        537
   Cumulative effect of accounting change                                     -          -          -          -        (45)
----------------------------------------------------------------------------------------------------------------------------

   Net earnings                                                       $     425        252        462        360        492
----------------------------------------------------------------------------------------------------------------------------

Net earnings per common sharebasic                                    $    0.52       0.27       0.46
Net earnings per common sharediluted                                       0.49       0.26       0.45        N/A        N/A
----------------------------------------------------------------------------------------------------------------------------

Balance sheet data:
   Total assets                                                       $  77,287     62,169     51,515     55,002     42,660
   Investment securities held to maturity                                     -     10,396     15,289     16,431     17,213
   Mortgage-backed and related securities held to maturity                    -     13,874     15,805      7,874      7,774
   Investment securities available for sale                               9,794      6,981          -          -          -
   Mortgage-backed and related securities available for sale             33,937      8,150          -          -          -
   Loans receivable, net                                                 28,995     20,767     16,514     15,255     15,091
   Deposits                                                              48,102     45,688     38,043     35,825     37,114
   Stockholders' equity                                                  11,938     12,342     13,157      5,656      5,295

Financial ratios:
   Return on average assets                                                0.62%      0.46%      0.93%      0.74%      1.17%
   Return on average equity                                                3.48       1.96       3.42       6.58       9.73
   Average equity to average assets                                       17.95      23.36      27.18      11.21      12.03
   Net yield on average interest-earning assets                            2.68       3.11       3.27       3.18       3.87

</TABLE>
                                                                     (Continued)

                                       4
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                  For the year ended June 30
                                ----------------------------------------------------------------------------------------------
                                           1998                             1997                           1996
                                -------------------------      -------------------------      --------------------------------
                                                      Average                         Average                          Average
                                Average                yield/   Average               Yield/    Average                yield/
                                balance      Interest  cost     balance      Interest  cost     balance      Interest   cost
------------------------------------------------------------------------------------------------------------------------------

Interest-earning assets:
<S>                            <C>         <C>         <C>      <C>           <C>         <C>     <C>           <C>        <C>  
   Loans receivable (1)        $24,130,515 $2,071,506    8.58%  $18,283,543   $1,563,605    8.55% $15,754,753   $1,376,334   8.74%
   Securities held to                                                                     
   maturity:                                                                              
    Mortgage-backed                                                                       
      and related securities     7,226,040    453,033    6.27    14,947,287    1,044,024    6.98   11,410,198      784,869   6.88
    Investment securities        5,164,420    295,402    5.72    12,689,898      749,059    5.90   18,055,614    1,090,543   6.04
   Securities available                                                                   
   for sale:                                                                              
    Mortgage-backed                                                                       
      and related securities    17,876,631  1,233,835    6.90     2,695,970      168,357    6.24            0            0   0.00
    Investment securities        8,984,208    584,221    6.50     2,219,892      147,775    6.66            0            0   0.00
   FHLB stock                      408,007     28,060    6.88       333,500       23,522    7.05      330,792       23,765   7.18
   Other interest-earning                                                                 
     assets (2)                  1,378,145     81,864    5.94     3,017,686      173,275    5.74    3,550,681      211,640   5.96
                                ----------  ---------            ----------    ---------           ----------    ---------
                                                                                          
Total interest-earning                                                                    
  assets                        65,167,966  4,747,921    7.29    54,187,776    3,869,617    7.14   49,102,038    3,487,151   7.10
                                ----------  ---------            ----------    ---------           ----------    ---------
                                                                                          
Noninterest-earning assets       1,521,245                          610,413                           698,754
                                ----------                       ----------                        ----------
                                                                                          
Total assets                   $66,689,211                      $54,798,189                       $49,800,792                     
                                ----------                       ----------                        ----------
                                                                                          
Interest-bearing                                                                          
liabilities:                                                                              
   Passbook savings                                                                       
     accounts                      867,074     23,696    2.73       987,693       25,130    2.54    1,394,964       33,968   2.44
   Money market                                                                           
     savings accounts            6,153,126    221,899    3.61     7,077,184      275,769    3.90    5,550,747      196,842   3.55
   Certificates of                                                                        
     deposit                    39,580,590  2,333,739    5.90    32,394,479    1,846,365    5.70   28,561,491    1,652,027   5.78
   FHLB advances                 7,012,335    419,138    5.98       726,923       38,485    5.29            0            0   0.00
                                ----------  ---------             ---------     --------           ----------    ---------
                                                                                          
Total interest-bearing                                                                    
  liabilities                   53,613,125  2,998,472    5.59    41,186,279    2,185,749    5.31   35,507,202    1,882,837   5.30
                                ---------   ---------             ---------     --------           ----------    ---------
                                                                                          
Noninterest-bearing                                                                       
  liabilities                    1,093,901                          785,044                           758,718
                                ----------                        ---------                        ---------
                                                                                          
Total liabilities               54,707,026                       41,971,323                        36,265,920
                                                                                          
Retained earnings               11,982,185                       12,826,866                        13,534,872
                                ----------                        ---------                        ----------
                                                                                          
Total liabilities and                                                                     
  retained earnings            $66,689,211                      $54,798,189                       $49,800,792               
                                ----------                       ---------                         ----------
                                                                                          
Net interest income                        $1,749,449                         $1,683,868                        $1,604,314
                                            --------                           ---------                          ---------
                                                                                          
Net interest rate spread (3)                             1.70%                              1.83%                            1.80%
                                                        -----                              -----                           ------
                                                                                          
Net yield on average interest-                                                            
  earning assets(4)                                      2.68%                               3.11%                            3.27%
                                                        -----                              ------                           ------
                                                                                          
Ratio of average interest-                                                                
  earning average interest-                                                               
  bearing liabilities                                   121.55%                             131.57%                          138.29%
                                                        ------                             ------                           -------
</TABLE>                                                                       
                                                                                
<TABLE>                                                                        
<CAPTION>                                                                  
<S> <C>                                                                                         
(1) Average balances include non-accrual loans.                                                 
(2) Includes interest-bearing deposits in other financial institutions.                         
(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of 
      interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
(5) Tax exempt income was not significant and thus is not presented on tax equivalent basis.    
</TABLE>                                                                        
                                                              (Continued) 

                                       5
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

Rate/Volume Analysis

                                                              Year ended June 30,                       Year ended June 30,
                                                  ------------------------------------------  --------------------------------------
                                                               1998 versus 1997                           1997 versus 1996
                                                    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                              $ 500,032     5,962       1,907    507,901   220,915  (28,990)  (4,654)  187,271
Securities held to maturity:
    Mortgage-backed and related securities         (539,307) (106,911)     55,227   (590,991)  243,304   12,100    3,751   259,155
    Investment securities                          (444,214)  (23,204)     13,761   (453,657) (324,085) (24,756)   7,358  (341,483)
Securities available for sale:
    Mortgage-backed and related securities          947,997    17,717      99,764  1,065,478   168,357        -        -   168,357
    Investment securities                           450,291    (3,421)    (10,424)   436,446   147,775        -        -   147,775
FHLB stock                                            5,255      (586)       (131)     4,538       195     (434)      (5)     (244)
Other interest-earning assets                       (94,142)    5,980      (3,249)   (91,411)  (31,769)  (7,761)   1,165   (38,365)
-----------------------------------------------------------------------------------------------------------------------------------

Total interest earning assets                       825,912  (104,463)    156,855    878,304   424,692  (49,841)   7,615   382,466
-----------------------------------------------------------------------------------------------------------------------------------

Interest expense:
    Passbook savings accounts                        (3,069)    1,862        (227)    (1,434)   (9,917)   1,524     (445)   (8,838)
    Money market savings accounts                   (36,007)  (20,546)      2,683    (53,870)   54,131   19,448    5,348    78,927
    Certificates of deposit                         409,581    63,669      14,124    487,374   221,704  (24,128)  (3,238)  194,338
    FHLB advances                                   332,765     4,964      42,924    380,653    38,485        -        -    38,485
-----------------------------------------------------------------------------------------------------------------------------------

Total interest-bearing liabilities                  703,270    49,949      59,504    812,723   304,403   (3,156)   1,665   302,912
-----------------------------------------------------------------------------------------------------------------------------------

Net change in interest income                     $ 122,642  (154,412)     97,351     65,581   120,289  (46,685)   5,950    79,554
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                       (Continued)

                                       6
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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


Comparison of Operating Results for the Years Ended June 30, 1998 and 1997

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  $425,000  for the year ended June 30,  1998,  as compared to
$252,000  for the year ended June 30,  1997.  This  represented  an  increase of
$173,000, or 68.65%. The increase in net earnings was primarily  attributable to
lower  noninterest  expense  during the year ended June 30, 1998.  In the fiscal
year ended June 30,  1997,  the  Company  incurred a pretax  $237,000,  one-time
special  assessment  required by the Federal Deposit  Insurance  Corporation and
levied on thrift institutions to recapitalize the Savings Association  Insurance
Fund (SAIF).  In addition,  in the fiscal year ended June 30, 1997,  the Company
incurred  an  additional  $102,000  in  professional  fees  as a  result  of  an
unsuccessful acquisition attempt.

The increase in net earnings was also  attributable  to a $75,000  increase,  or
133.93% in noninterest  income. The increase in noninterest income was primarily
a result of an increase  in net gains on the sale of  securities  available  for
sale and increased  fees and service  charges.  The increase in net earnings was
also  attributable to a $65,000,  or 3.86% increase in net interest income.  The
increase in net earnings was also impacted by a $127,000 increase,  or 17.81% in
compensation and employee benefits, a $106,000 increase, or 77.37% in income tax
expense, and a $38,000, or 100.00% increase in provision for loan losses.

Net Interest Income

Net interest income increased by $65,000, or 3.86%, from $1,684,000 for the year
ended June 30, 1997 to $1,749,000 for the year ended June 30, 1998. The increase
in net interest  income is  primarily  due to  increased  net interest  earnings
generated  through growth of the Company over the past fiscal year. The increase
in net  interest  income was also  adversely  impacted  by a decrease in the net
interest spread in comparison of the two fiscal years.

The Company's average  interest-earning assets increased $10,980,000,  or 20.26%
from  $54,188,000 at June 30, 1997, to $65,168,000 at June 30, 1998.  Similarly,
the Company's average  interest-bearing  liabilities increased  $12,427,000,  or
30.17% from  $41,186,000 at June 30, 1997 to $53,613,000 at June 30, 1998. While
the Company's  interest-bearing  liabilities increased at a faster rate than its
interest-earning  assets  due  primarily  to the  use  of  investable  funds  to
repurchase  the  Company's  common  stock over the  previous 12 months,  the net
interest  earnings  generated by the growth  exceeded  the interest  income lost
through use of the funds for stock repurchases and other uses. During the fiscal
year ended June 30, 1998, stock repurchases  totaled  $1,140,000.  The Company's
net interest  income was also impacted by a decline in its net interest  spread.
The Company's  net interest  spread was 1.70% and 1.83% for the years ended June
30, 1998 and 1997, respectively.  The decrease in the net interest spread is the
result of cost of liabilities rising more rapidly than interest earning assets.

                                                                     (Continued)


                                       7




<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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

Interest Income

Interest  income was $4,748,000 for the year ended June 30, 1998, as compared to
$3,870,000  for the year  ended  June 30,  1997,  representing  an  increase  of
$878,000,  or 22.69%.  The increase in interest  income was primarily due to the
aforementioned  increase in  interest-earning  assets.  The increase in interest
income was also affected by an increase in the overall yield on interest-earning
assets. For the year ended June 30, 1998, the yield on  interest-earning  assets
was 7.29%,  as compared to 7.14% for the year ended June 30, 1997.  The increase
in yield  on  interest-earning  assets  was due  primarily  to the  larger  loan
portfolio in the year ended June 30, 1998.

Interest on loans receivable increased by $508,000, or 32.48%, to $2,072,000 for
the year ended June 30, 1998, as compared to $1,564,000  for the year ended June
30, 1997.  Such  increase  was due to a  $5,847,000,  or 31.98%  increase in the
average balance of loans receivable from $18,284,000 for the year ended June 30,
1997 to  $24,131,000  for the year ended June 30, 1998. The increase in interest
on loans  receivable  was also  affected by an increase in the average  yield on
loans  receivable  from 8.55% for the year ended June 30, 1997, to 8.58% for the
year ended June 30, 1998.

In January 1997,  management began designating all purchases of  mortgage-backed
and related  securities  as available for sale.  Subsequently,  in January 1998,
management  redesignated all mortgage-backed and related securities as available
for sale. As a result of this strategy,  interest income on mortgage-backed  and
related securities held to maturity declined $591,000, or 56.61% from $1,044,000
for the year ended June 30, 1997 to $453,000  for the year ended June 30,  1998.
The decrease in interest income on  mortgage-backed  and related securities held
to  maturity  is a result of a  $7,721,000  decrease,  or 51.66% in the  average
balance of mortgage-backed and related securities held to maturity in comparison
of the years ended June 30, 1998 and 1997, respectively.  This decrease was also
affected  by a  decrease  in  the  yield  on  the  mortgage-backed  and  related
securities  held to  maturity  from 6.98% for the year ended June 30,  1997,  to
6.27% for the year ended June 30, 1998.

Interest income on  mortgage-backed  and related  securities  available for sale
increased $1,066,000,  or 634.52% from $168,000 for the year ended June 30, 1997
to $1,234,000 for the year ended June 30, 1998. The increase in interest  income
on  mortgage-backed  and  related  securities  available  for  sale was due to a
$15,181,000,  or 563.09% increase in the average balance of mortgage-backed  and
related   securities   available  for  sale,   primarily  as  a  result  of  the
aforementioned  portfolio  redesignation.  The increase was also  impacted by an
increase in yield on the  mortgage-backed  and related securities  available for
sale  from  6.24%  to  6.90%  for the  years  ended  June  30,  1997  and  1998,
respectively.

As with the  Company's  mortgage-backed  and related  securities  purchases,  in
January  1997,   management  began   designating  all  purchases  of  investment
securities as available for sale. In January 1998,  management also redesignated
all  investment  securities  available for sale.  As a result of this  strategy,
interest income on investment  securities held to maturity declined $454,000, or
60.61% from  $749,000  for the year ended June 30, 1997 to $295,000 for the year
ended June 30, 1998.  The decrease in interest  income on investment  securities
held to maturity is a result of a $7,526,000 decrease,  or 59.31% in the average
balance of  investment  securities  held to maturity in  comparison of the years
ended June 30, 1998 and 1997, respectively. This decrease was also affected by a
decline in the yield on the  investment  securities  held to maturity from 5.90%
for the year ended June 30, 1997, to 5.72% for the year ended June 30, 1998.

Interest income on investment  securities available for sale increased $436,000,
or 294.59%  from  $148,000  for the year ended June 30, 1997 to $584,000 for the
year  ended  June 30,  1998.  The  increase  in  interest  income on  investment
securities  available for sale was due to a $6,764,000,  or 304.68%  increase in
the average balance of investment  securities available for sale, primarily as a
result of the aforementioned portfolio redesignation. The increase was partially
offset by a slight decrease in yield on the investment  securities available for
sale  from  6.66%  to  6.50%  for the  years  ended  June  30,  1997  and  1998,
respectively.

                                                                     (Continued)

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Annual Report

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

Interest income on cash and cash equivalents decreased by $91,000, or 52.60% for
the years ended June 30, 1998 and 1997,  respectively.  The decrease is a result
of  management's  decision  to decrease  its average  balance in cash on hand in
order to enhance overall yield.  Interest income on FHLB stock increased $4,000,
or 16.67%, owing to higher investment in FHLB stock during the fiscal year ended
June 30, 1998.

Interest Expense

Interest expense increased by $812,000,  or 37.15%, from $2,186,000 for the year
ended June 30, 1997 to $2,998,000 for the year ended June 30, 1998. The increase
in interest  expense  resulted  from a  $12,427,000,  or 30.17%  increase in the
average balance of  interest-bearing  liabilities  from $41,186,000 for the year
ended June 30,  1997,  to  $53,613,000  for the year ended  June 30,  1998.  The
increase  in interest  expense  was also  impacted by an increase in the average
cost of  interest-bearing  liabilities  to 5.59%  during the year ended June 30,
1998, as compared to 5.31% for the year ended June 30, 1997. The increase in the
Company's  interest-bearing  liabilities was a result of a $6,142,000, or 15.18%
increase  in the  average  balance  of  deposits  and a  $6,285,000,  or 864.51%
increase in the average  balance of FHLB advances.  The increase in deposits was
largely  a result  of  increased  public  deposits  (i.e.  deposits  from  local
governmental  entities)  which  typically  are more  volatile  and  costly  than
traditional retail deposits. The increase in FHLB advances was primarily to fund
increases in loan production and mortgage-backed securities purchases.

Provision for Loan Losses

The  Company's  provision for loan losses was $38,000 and $0 for the years ended
June 30, 1998 and 1997,  respectively.  The Company has experienced  substantial
loan  growth  including  commercial,  agricultural,  and 1-4 family  residential
mortgage loans. While no known loan losses are identified,  the provision was in
response  to  inherent  losses as a result of growth in the loan  portfolio.  As
such,  the Company  intends to regularly  provide for loan losses.  The level of
this provision is dependent on loan growth, delinquencies,  economic conditions,
and other  various  factors used by  management  in the  assessment  of its loan
portfolio and overall level of loan loss  reserves.  The Company is committed to
maintaining  adequate  allowances  for loan losses,  regardless of the impact on
reported earnings.

At June 30, 1998 and 1997,  the allowance for loan losses  totaled  $251,000 and
$213,000,  respectively.  The Company's net  charge-offs  were $0 and $0 for the
fiscal  years ended June 30, 1998 and 1997,  respectively.  At June 30, 1998 and
1997, the allowance for loan losses  represented  0.86% and 1.02% of total loans
receivable,  respectively.  Nonaccrual  loans  totaled  $0 and $0 for the fiscal
years  ended June 30,  1998 and 1997,  respectively.  At June 30, 1998 and 1997,
classified assets totaled $37,000 and $121,000, respectively.

Noninterest Income

Noninterest income increased $76,000,  or 135.71% for the fiscal year ended June
30, 1998 in comparison  to the fiscal year ended June 30, 1997.  The increase is
attributable  to a  $40,000  increase  in net  gains  realized  on the  sale  of
securities available for sale. In addition,  the increase was also impacted by a
$36,000, or 80.00% increase in fees and service charges. The increase is largely
a result of a one-time, $20,000 commercial loan prepayment fee.

                                                                     (Continued)

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Noninterest Expense

Noninterest  expense decreased by $178,000,  or 13.17%,  from $1,352,000 for the
year ended June 30, 1997 to  $1,174,000  for the year ended June 30,  1998.  The
decrease in total  noninterest  expense was primarily due to the  aforementioned
pretax $237,000 one-time special deposit insurance fund assessment in the fiscal
year ended June 30, 1997.  In addition,  the decrease was also due to a $95,000,
or 48.72%  decrease in  professional  fees, and a $23,000 or 44.23%  decrease in
federal deposit insurance premiums.  During the fiscal year ended June 30, 1997,
the Company  incurred  higher  professional  fees as a result of an unsuccessful
acquisition  attempt.  The decrease in federal deposit insurance premiums is due
to lower deposit  insurance fund assessments as a result of federal  legislation
enacted in 1996.

The  decrease in  noninterest  expense was  partially  offset by a $127,000,  or
17.81% increase in compensation and employee  benefits expense,  an $11,000,  or
10.58%  increase  in other  expenses,  and an  $8,000,  or  42.11%  increase  in
advertising  expense.  The increase in  compensation  and  employee  benefits is
primarily due to an increase in staff. As a result of its October 1997 automated
data  processing  conversion,  the Company now reports data  processing  expense
separately.  During the fiscal year ended June 30, 1998, data processing expense
totaled $32,000. In previous periods, data processing expense was not material.

Income Taxes

The Company's income tax expense increased by $106,000, or 77.37%, from $137,000
for the year ended June 30, 1997,  to $243,000 for the year ended June 30, 1998.
The change in income taxes was due primarily to an increase in pre-tax  earnings
of  $280,000,  or 72.16%,  from  $388,000  for the year  ended June 30,  1997 to
$668,000 for the year ended June 30, 1998.  The  effective  tax rates for fiscal
1998, 1997 and 1996 were 36.4%,  35.2% and 31.3%.  The effective rate was higher
in fiscal  1998 than in 1997  because th Bank had fewer tax exempt  investments.
The  effective  rate in 1996 was lower because of a benefit  recognized  for bad
debt reserves.

Financial Condition

The Company's total assets increased by $15,118,000, or 24.32%, from $62,169,000
at June 30, 1997 to  $77,287,000 at June 30, 1998. The increase in the Company's
size  primarily  reflected an increase in the level of FHLB advances  during the
fiscal year ended June 30,  1998.  These  advances  were used  primarily to fund
increased loan production and purchases of mortgage-backed securities.

Cash and cash equivalents increased by $1,245,000,  or 162.96%, from $764,000 at
June 30, 1997 to $2,009,000 at June 30, 1998. The increase in cash was primarily
due to the  procurement of FHLB advances in late June 1998 in order to fund loan
and security  purchases  commitments.  The Company  continues to maintain  lower
levels of cash and cash  equivalents  in order to  enhance  overall  yield.  The
Company's average cash balance declined  $1,640,000,  or 54.34% in comparison of
the fiscal years ended June 30, 1998 and 1997, respectively.

The Company's loans receivable,  net, increased  $8,228,000,  or 39.62% over the
year ended June 30, 1997.  The increase in loans was  primarily due to expansion
in the Company's  agricultural  and  commercial  lending  programs as previously
announced. During the fiscal year ended June 30, 1998, the Company announced the
hiring of an experienced  agricultural and commercial loan officer to expand the
Company's lending programs.  As a result,  during the fiscal year ended June 30,
1998, the Company  originated $5.2 million in agricultural and commercial loans.
These loans primarily included  agricultural  operating and term loans, but also
included  agricultural  real  estate and  commercial  operating  and real estate
loans. Large concentrations of credit include two participation loans to a local
casino totaling $737,000 at June 30, 1998, secured by the casino's revenues, and
an agricultural operating loan with a June 30, 1998 balance of $537,000, secured
by  agricultural  cooperative  stock.  The Company also  increased  its 1 family
residential loan portfolio by approximately $4.1 million since June 30, 1997.

                                                                     (Continued)

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Annual Report

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


The  continued  increase in the  Company's  loan  portfolio  and changes in loan
portfolio mix will increase the Company's credit risk exposure.  Furthermore, in
conjunction  with this increase in loans  receivable,  the Company is increasing
its allowance for loan losses.

As previously  noted,  effective  January 1, 1998,  the Company  designated  all
investment  securities,  including  mortgage-backed  and related  securities  as
available for sale. Previously, the Company maintained a portfolio of investment
securities and mortgage-backed  and related securities  purchased before January
1997  as  held  to  maturity.  The  purpose  of the  designation  is to  enhance
operational flexibility and liquidity. To this extent, $20,596,000 in investment
securities,  including  mortgage-backed  and relate securities were specifically
redesignated  available for sale. The Company will not maintain any investments,
including  mortgage-backed  and related  securities  as held to maturity for the
foreseeable future.

Overall, the Company's mortgage-backed and related securities available for sale
increased  $25,787,000,  or 316.40%  from June 30,  1997 to June 30,  1998.  The
increase in mortgage-backed and related securities  available for sale is due to
the aforementioned  redesignation of $12,101,000 in  mortgage-backed  securities
previously   designated  held  to  maturity  and  $19,626,000  in  purchases  of
mortgage-backed  and related  securities  available for sale. No mortgage-backed
and related  securities  designated  held to maturity were purchased  during the
year ended June 30, 1998.  The  carrying  value of  mortgage-backed  and related
securities  reflected  an  increase  of  $211,000  due to  market  appreciation.
Mortgage-backed  and related securities  previously  designated held to maturity
reflected net market  appreciation of $140,000 at redesignation to available for
sale.

The Company's investment securities available for sale increased $2,813,000,  or
40.30%  from  June  30,  1997 to June  30,  1998.  The  increase  in  investment
securities  available  for sale is due to the  aforementioned  redesignation  of
$8,495,000 in investment  securities  previously designated held to maturity and
$2,490,000  in  purchases  of  investment  securities  available  for  sale.  No
investment securities designated held to maturity were purchased during the year
ended June 30, 1998.  The carrying value of investment  securities  reflected an
increase of $9,000 due to market appreciation.  Investment securities previously
designated  held to maturity  reflected  net market  appreciation  of $10,000 at
redesignation to available for sale.

The Company's  deposits  increased by $2,414,000,  or 5.28%, from $45,688,000 at
June 30, 1997 to  $48,102,000  at June 30, 1998. At June 30, 1998, the Company's
Federal  Home Loan Bank  (FHLB)  advances  totaled  $16,200,000,  an increase of
$12,700,000,  or 362.86% from  $3,500,000  at June 30, 1997.  The advances  were
primarily  utilized  to  fund  increased  loan  production  and  mortgage-backed
securities  purchases  during the fiscal year.  The Company's  advances  include
$8,000,000  in 15 year  amortizing  advances  which  are  utilized  to fund  the
retention  of long term 1-4  family  residential  mortgage  loans as part of the
Company's  interest-rate risk management  strategies.  The advances also include
$5,000,000 in advances that may be called by the FHLB.  Should these advances be
called,  the FHLB has  committed to provide  replacement  advances,  at the then
current market interest rate.

In order to productively  leverage its capital, the Company may continue to seek
additional  deposits  through  traditional  deposit  products  and  new  deposit
products, as well as increased utilization of FHLB advances, to fund loan growth
and securities  purchases.  FHLB advances provide an alternative source of funds
for the Company, at costs substantially  equivalent to, or lower than its retail
deposit products.

Stockholders'  equity decreased $404,000,  or 3.27% from $12,342,000 at June 30,
1997 to  $11,938,000  at June 30, 1998.  The decrease was  primarily  due to the
repurchase of the Company's  common stock.  Repurchases  of common stock totaled
$1,140,000  during the fiscal year ended June 30,  1998.  The  decrease was also
impacted by the Company's $425,000 in net earnings,  a $135,000 after tax market
change in appreciation of the Company's available for sale securities portfolio,
an $87,000  decrease  in unearned  management  stock  bonus plan  shares,  and a
$66,000 decrease in unearned employee stock ownership plan shares.

                                                                     (Continued)

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Annual Report

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


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

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  Bank  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.

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.

                                                                     (Continued)

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Annual Report

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


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.

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.

                                                                     (Continued)

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Annual Report

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


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  Bank  currently  pays  substantially  lower  federal  deposit
insurance  premiums.  Excluding  th $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.

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.

                                                                     (Continued)

                                       14
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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


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.

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 stockholders' equity was also affected by a $3,000 adjustment due to
valuation  of the  Company's  available  for sale  securities.  The  decrease in
stockholders'  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.

                                                                     (Continued)

                                       15
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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


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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                                                                                          1998            1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>             <C>    
Loans accounted for on a nonaccrual basis:
    Mortgage loans:
         Loan secured by 1-4 dwelling units                                             $   -                -
         All other mortgage loans                                                           -                -
    Nonmortgage loans                                                                       -                -
--------------------------------------------------------------------------------------------------------------------

Total                                                                                   $   -                -
--------------------------------------------------------------------------------------------------------------------

Accruing loans which are contractually past due 90 days or more:
     Mortgage loans:
       Loans secured by 1-4 dwelling units                                               75,292          120,902
       All other mortgage loans                                                             -                -
       Non-mortgage loans                                                                15,414              -
--------------------------------------------------------------------------------------------------------------------

Total                                                                                   $90,706          120,902
--------------------------------------------------------------------------------------------------------------------

Total nonaccrual and accrual loans                                                      $90,706          120,902
--------------------------------------------------------------------------------------------------------------------

Real estate                                                                             $  -              13,520
--------------------------------------------------------------------------------------------------------------------

Other nonperforming assets                                                              $  -                -
--------------------------------------------------------------------------------------------------------------------

Total nonperforming assets                                                              $90,706          134,422
--------------------------------------------------------------------------------------------------------------------

Total nonaccrual and accrual loans to net loans                                            0.31%            0.58%
--------------------------------------------------------------------------------------------------------------------

Total nonaccrual and accrual loans to total assets                                         0.12%            0.19%
--------------------------------------------------------------------------------------------------------------------

Total nonperforming assets to total assets                                                 0.12%            0.22%
--------------------------------------------------------------------------------------------------------------------
</TABLE>

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, 1998 and 1997, was $0 and $296, respectively.

                                                                     (Continued)

                                       16
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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


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:

<TABLE>
<CAPTION>

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

                                                                 At or for the year
                                                                    ended June 30
                                                     -----------------------------------------

                                                       1998          1997           1996
-----------------------------------------------------------------------------------------------

<S>                                                  <C>            <C>            <C>    
Allowance (at beginning of year)                      $213,034       213,034        213,034
    Charge-offs                                           -             -              -
    Recoveries                                            -             -              -
-----------------------------------------------------------------------------------------------
    Net charge-offs                                      -              -              -
    Provision                                           38,000          -              -
-----------------------------------------------------------------------------------------------

Allowance (at end of year)                            $251,034       213,034        213,034
-----------------------------------------------------------------------------------------------

Allowance for loan losses as a percent of total
    loans outstanding                                     0.86%         1.02%          1.27%
Net loans charged off as a percent of average
    loans outstanding                                     0.00          0.00           0.00
-----------------------------------------------------------------------------------------------
</TABLE>

Liquidity and Capital Resources

The Company's  primary  sources of funds are deposits,  FHLB advances,  proceeds
from maturing  investment  securities,  and  principal and interest  payments on
loans and mortgage-backed  securities 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, 1998 and 1997,  the Company's  loan  portfolio,
net, increased $8,228,000 and $4,253,000, respectively. During the same periods,
the Company  purchased  investment  securities and  mortgage-backed  and related
securities in the amounts of  $22,117,000  and  $16,233,355,  respectively.  The
primary  financing  activity of the Compan is the attraction of savings deposits
and utilization of FHLB advances.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Bank has the ability to obtain  additional  advances  from the Federal Home Loan
Bank of Des Moines.  During the twelve months ended June 30, 1998 and 1997,  the
Bank  utilized  advances  of  $23,500,000  and  $5,500,000,   respectively.  The
Company's  advances include  $5,000,000  which include call  provisions.  In the
event that these  advances  are called,  the FHLB has  committed to providing an
alternative  funding,  at market  rates and terms.  In addition,  commencing  in
January  1998,  the  Company's   redesignation  of  all  investment  securities,
including  mortgage-backed  and related  securities  as available  for sale,  is
intended to increase liquidity and overall operational flexibility.

The Bank 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 4.0%.

                                                                     (Continued)

                                       17
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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


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.   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, 1998 and 1997, cash and cash  equivalents  totaled  $2,009,000 and $764,000,
respectively.  Investment  securities,  including  mortgage-backed  and  related
securities  designated available for sale totaled $43,731,000 and $15,131,000 at
June 30, 1998 and 1997, respectively.

Federal savings institutions are required to satisfy three capital requirements:
(i) a  requirement  that  "tangible  capital"  equal or excess  1.5% of tangible
assets,  (ii) a requirement that "core capital" equal or excess 3.0% of adjusted
tangible assets, and (iii) a risk-based capital requirement currently of 8.0% of
"risk-adjusted" assets. The Bank currently meets all 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) Bank Corporate Title Change

         In June 1998, Redwood Financial,  Inc. announced that it had approved a
         change in the corporate  title of the Redwood Falls Federal Savings and
         Loan Association (the  Association) to the "HomeTown Bank". The Company
         stated  that the  purpose of the change in the  corporate  title of the
         Association  is to reflect  changes in its banking  operations  and the
         banking  products  that  it  offers  and  plans  to  offer.  Since  the
         conversion of the Association from a federally chartered mutual savings
         and loan  association to a federally  chartered  stock savings and loan
         association  in July 1995, the  Association  has endeavored to become a
         community  bank offering  additional  lending and deposit  products and
         services.  The  Company  believes  that the name change  reflects  this
         effort  and  will  assist  in  attracting  new  customers  and  further
         strengthening its relationships with its current customers.

              (2) Year 2000 Consideration

         The Company's  primary exposure to the Year 2000 issue is its automated
         data  processing  system  which  had been  determined  to be Year  2000
         noncompliant.  On August 4, 1998,  the Company  received  its Year 2000
         compliant  release from its data  processing  provider.  Management has
         begun  testing  the  release  to  ensure  that  the  software  properly
         addresses  all  pertinent  risks  identified  by the Federal  Financial
         Institutions  Examination  Council and its data processing  vendor. The
         company expects to have its testing substantially completed by December
         31, 1998.

                                                                     (Continued)

                                       18
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Annual Report

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


         The Company has also  recently  begun using  various  telecommunication
         services  provided  by the Federal  Reserve  Bank of  Minneapolis.  The
         Company has begun the testing of this service with  assistance from the
         Federal  Reserve  Bank.  Also, as part of the  construction  of its new
         office  building,  the Company is in process of updating its  telephone
         network,  which is currently not Year 2000 compliant.  The Company also
         has several lesser Year 2000 issues (i.e., various non-mission critical
         applications) that are also being addressed.

         The Company has lessor exposure to borrower delinquencies arising after
         Year 2000 due to its 1-4 family residential  lending emphasis. However,
         as the Company broadens its lending  activities  to  include commercial
         lending, as part of its credit underwriting, the Company  is  prudently
         assessing  Year 2000 sensitivity of all commercial loan applicants.

         At this time, the Company expects that its Year 2000 compliance efforts
         will have no  material  financial  effect  (i.e.,  less  than  $5,000).
         However,  a substantial  amount of current staff time is being expended
         on Year 2000 assessment and testing. Should the Company fail to correct
         its Year 2000  deficiencies  by December  31, 1999,  the Company  could
         expect a substantial  disruption to daily  operations.  Such disruption
         could have a material  effect on the Company's  financial  position and
         future earnings.  To this extent, the Company's  contingency plan is to
         re-commence  manual data  processing  operations.  As the Company  only
         recently  converted from manual to automated data processing in October
         1997,  the Company  still  retains  the  equipment  and  trained  staff
         necessary to re-commence manual data processing operations. The Company
         plans to re-assess its contingency plan pending the results of on-going
         testing.

              (3) New Facility Update

         On April 28, 1998,  the Company  announced its intention to construct a
         new  bank  facility  on the  east  side of  Redwood  Falls,  Minnesota.
         Construction  commenced shortly  thereafter.  The building is currently
         scheduled  for  completion  in  January  1999  with  occupancy  shortly
         thereafter. The building will permit the Company to provide several new
         deposit and banking  services  that are not  currently  being  offered.
         Development of these services is currently being addressed. The Company
         estimates that the new facility will decrease earnings by approximately
         $120,000  per year.  This  estimate  does not  reflect  any  additional
         staffing  or  other  indirect  costs  which  may be  incurred,  nor any
         additional  revenues  which may be  generated.  The Company  expects to
         continue utilizing its existing downtown Redwood Falls location.


                                       19


<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 1998 and 1997
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                                           Assets                                                  1998           1997
---------------------------------------------------------------------------------------------------------------------------

<S>                                                                                          <C>               <C>   
Cash                                                                                         $       20,448         15,314
Interest bearing deposits with banks                                                              1,988,780        748,478
---------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents                                                                         2,009,228        763,792

Securities available for sale:
   Mortgage-backed and related securities (amortized cost $33,726,372
      and $8,143,694)                                                                            33,937,175      8,149,752
   Investment securities (amortized cost $9,784,454 and $6,992,534)                               9,793,500      6,981,250
---------------------------------------------------------------------------------------------------------------------------

Total securities available for sale                                                              43,730,675     15,131,002

Securities held to maturity:
   Mortgage-backed and related securities (market value $0 and $14,082,280)                            -        13,873,801
   Investment securities (market value $0 and $10,399,446)                                             -        10,395,659
---------------------------------------------------------------------------------------------------------------------------

Total securities held to maturity                                                                      -        24,269,460

Loans receivable, net                                                                            28,994,750     20,766,539
Federal Home Loan Bank stock, at cost                                                               835,000        333,500
Accrued interest receivable                                                                         547,898        613,357
Premises and equipment, net                                                                         596,867        212,067
Real estate, net                                                                                       -            13,520
Investment in limited partnership                                                                   484,024           -  
Other assets                                                                                         88,163         65,679
---------------------------------------------------------------------------------------------------------------------------

Total assets                                                                                 $   77,286,605     62,168,916
---------------------------------------------------------------------------------------------------------------------------


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

Deposits                                                                                         48,101,806     45,687,590
Federal Home Loan Bank advances                                                                  16,200,000      3,500,000
Accrued interest payable                                                                            631,168        405,623
Advance payments by borrowers for taxes and insurance                                                75,463         69,744
Accrued expenses and other liabilities                                                              340,142        163,926
---------------------------------------------------------------------------------------------------------------------------

Total liabilities                                                                                65,348,579     49,826,883
---------------------------------------------------------------------------------------------------------------------------

Common stock ($.10 par value). Authorized and issued 1,125,000 shares;
   outstanding 868,093 shares at June 30, 1998; 961,875 at June 30, 1997                            112,500        112,500
Additional paid-in capital                                                                        8,490,163      8,467,833
Retained earnings, subject to certain restrictions                                                6,794,926      6,369,591
Net unrealized gain (loss) on securities available for sale                                         131,909         (3,135)
Unearned employee stock ownership plan shares                                                      (463,264)      (529,504)
Unearned management stock bonus plan shares                                                        (220,172)      (306,797)
Treasury stock, at cost, 256,907 and 163,125 shares in 1998 and 1997, respectively               (2,908,036)    (1,768,455)
---------------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                                       11,938,026     12,342,033
---------------------------------------------------------------------------------------------------------------------------

Total liabilities and stockholders' equity                                                   $   77,286,605     62,168,916
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       20
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Earnings

Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------

                                                                                         1998         1997         1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>             <C>           <C>      
Interest income:
   Loans receivable                                                                 $  2,071,506    1,563,605     1,376,334
   Securities held to maturity:
      Mortgage-backed and related securities                                             453,033    1,044,024       784,869
      Investment securities                                                              295,402      749,059     1,090,544
   Securities available for sale:
      Mortgage-backed and related securities                                           1,233,835      168,357          -     
      Investment securities                                                              584,221      147,775          -   
   Cash equivalents and other                                                            109,924      196,797       235,404
----------------------------------------------------------------------------------------------------------------------------

Total interest income                                                                  4,747,921    3,869,617     3,487,151

Interest expense on deposits                                                           2,579,334    2,147,264     1,882,837
Interest expense on Federal Home Loan Bank advances                                      419,138       38,485             
----------------------------------------------------------------------------------------------------------------------------

Total interest expense                                                                 2,998,472    2,185,749     1,882,837

Net interest income                                                                    1,749,449    1,683,868     1,604,314
----------------------------------------------------------------------------------------------------------------------------

Provision for losses on loans                                                             38,000         -             -   
----------------------------------------------------------------------------------------------------------------------------

Net interest income after provision for losses on loans                                1,711,449    1,683,868     1,604,314
----------------------------------------------------------------------------------------------------------------------------

Noninterest income:
   Fees and service charges                                                               81,344       45,231        36,197
   Gain on sale of securities available for sale, net                                     41,741        2,863             
   Other                                                                                   8,168        8,384        24,314
----------------------------------------------------------------------------------------------------------------------------

Total noninterest income                                                                 131,253       56,478        60,511
----------------------------------------------------------------------------------------------------------------------------

Noninterest expense:
   Compensation and employee benefits                                                    839,660      713,001       648,859
   Professional fees                                                                      99,773      195,493       126,781
   Advertising                                                                            26,828       19,210        16,411
   Occupancy                                                                              31,874       31,746        28,181
   Data processing expense                                                                31,954         -             -   
   Federal deposit insurance premiums                                                     29,313       51,851        80,769
   Deposit insurance fund assessment                                                        -         237,085          -   
   Other                                                                                 115,056      103,792        90,880
----------------------------------------------------------------------------------------------------------------------------

Total noninterest expense                                                              1,174,458    1,352,178       991,881
----------------------------------------------------------------------------------------------------------------------------

Earnings before income taxes                                                             668,244      388,168       672,944

Income tax expense                                                                       242,909      136,668       210,512
----------------------------------------------------------------------------------------------------------------------------

Net earnings                                                                        $    425,335      251,500       462,432
----------------------------------------------------------------------------------------------------------------------------

Net earnings per common share-basic                                                 $    .52          .27           .46
Net earnings per common share-diluted                                                    .49          .26           .45
</TABLE>

See accompanying notes to consolidated financial statements.

                                       21
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                                                                   Net       Unearned
                                                                 unrealized Employee    Unearned
                                                                 gain (loss) Stock     management
                                          Additional          on 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, 1995      $       -          -   5,655,659          -          -            -           -    5,655,659

   Net earnings                       -          -     462,432          -          -            -           -      462,432

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

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

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

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

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

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

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

   Net earnings                       -          -     251,500          -          -            -           -      251,500

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

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

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

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

   Net earnings                       -          -     425,335          -          -            -           -      425,335

   Repurchase of common stock         -          -           -          -          -            -   (1,139,581) (1,139,581)

   Net unrealized gain on securities
     available for sale, net          -          -           -    135,044          -            -           -      135,044

   Earned employee stock
     ownership plan shares, net       -     22,330           -          -     66,240            -           -       88,570

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

Balance on June 30, 1998      $ 112,500   8,490,163  6,794,926    131,909   (463,264)    (220,172)  (2,908,036) 11,938,026
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       22
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows
                                                                             
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                                                                                1998             1997            1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>              <C>        
Operating activities:
   Net earnings                                                           $       425,335          251,500         462,432
   Adjustments to reconcile net earnings to net
     cash provided by operating activities:
        Provision for loan losses                                                  38,000                -               -
        Depreciation                                                               28,384           16,742          16,992
        Amortization of premiums and discounts, net                               (15,832)         (36,232)        (40,057)
        (Increase) decrease in other assets                                       (22,484)          28,313          15,440
        (Increase) decrease in accrued interest receivable                         65,459          (59,501)       (144,272)
        Increase (decrease) in accrued interest payable                           225,545          221,379         (50,453)
        Gain on sale of securities available for sale, net                        (41,741)          (2,863)              
        Amortization of unearned ESOP shares                                       66,240           66,240          66,240
        Earned ESOP shares priced above original cost                              22,330           10,816          10,781
        Earned Management Stock Bonus Plan shares                                  86,625           86,625          39,703
        Change in deferred income taxes                                            (5,178)         (56,854)         45,726
        Increase (decrease) in accrued expenses and other liabilities             176,216          (36,522)        (34,617)
        Federal Home Loan Bank stock dividend                                           -                -          (6,500)
---------------------------------------------------------------------------------------------------------------------------

Net cash provided by operating activities                                       1,048,899          489,643         381,415
---------------------------------------------------------------------------------------------------------------------------

Investing activities:
   Proceeds from maturities of investment securities held to maturity             500,000        4,895,000       4,000,200
   Purchases of investment securities held to maturity                                  -                -      (2,860,069)
   Purchases of mortgage-backed and related securities held
     to maturity                                                                        -                -      (9,964,830)
   Principal collected on mortgage-backed and related securities held
     to maturity                                                                2,034,858        1,927,523       2,075,679
   Proceeds from maturities of investment securities available for sale         9,600,000                -               -
   Purchases of investment securities available for sale                       (2,490,093)      (7,988,700)              -
   Proceeds from sales of investment securities available for sale                      -          999,376               -
   Proceeds from sales of mortgage-backed and related
     securities available for sale                                              1,011,469                -               -
   Purchases of mortgage-backed and related securities available for sale     (19,626,386)      (8,244,655)              -
   Principal collected on mortgage-backed and related securities available
     for sale                                                                   4,916,656          135,675               -
   Purchase of investment in limited partnership                                 (500,000)               -               -
   Purchases of Federal Home Loan Bank stock                                     (501,500)               -               -
   Increase in loans receivable, net                                           (8,315,637)      (4,262,925)     (1,350,152)
   Purchases of premises and equipment                                           (413,184)        (176,622)         (5,268)
---------------------------------------------------------------------------------------------------------------------------

Net cash used by investing activities                                         (13,783,817)     (12,715,328)     (8,104,440)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                            (Continued)
                                       23
<PAGE>

                                                            
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                                                                                1998             1997            1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                    <C>             <C>      
Financing activities:
   Decrease in funds held for stock subscriptions                         $             -                -     (13,127,630)
   Increase in deferred stock conversion costs                                          -                -         439,015
   Increase in deposits, net                                                    2,414,216        7,829,305       2,267,713
   Increase in advance payments by borrowers for taxes and insurance                5,719           14,058           2,204
   Proceeds from sale of common stock                                                   -                -       8,549,361
   Adoption of ESOP                                                                     -                -        (661,984)
   Proceeds from Federal Home Loan Bank advances                               23,500,000        5,500,000               -
   Repayment of Federal Home Loan Bank advances                               (10,800,000)      (2,000,000)              -
   Repurchase of common stock                                                  (1,139,581)      (1,227,049)       (965,156)
---------------------------------------------------------------------------------------------------------------------------

Net cash (used) provided by financing activities                               13,980,354       10,116,314      (3,496,477)
---------------------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash and cash equivalents                                1,245,436       (2,109,371)    (11,219,502)

Cash and cash equivalents, beginning of year                                      763,792        2,873,163      14,092,665
---------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year                                    $     2,009,228          763,792       2,873,163
---------------------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information:
   Cash paid during the period for:
     Interest                                                             $     2,772,927        1,964,370       1,933,290
     Income taxes                                                                 281,559          272,505         175,101

Supplemental noncash flow disclosures:
   Transfer of loans to real estate                                       $             -           13,520               -
   Transfer of real estate to loans                                                13,520                -               -
   Transfer of investment and mortgage-backed and related
     securities from held to maturity to available for sale                    20,596,006                -               -
   Loss on limited partnership recorded using the equity method                   (15,976)               -               -

</TABLE>

See accompanying notes to consolidated financial statements.

                                       24

<PAGE>
                                                             
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

June 30, 1998

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

(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 HomeTown Bank (the Bank),  formerly known as 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).


(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.

        (a)   Basis of Presentation

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

        (b)   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.

        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.

        (c)   Reclassifications

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

        (d)   Cash and Cash Equivalents

        Cash and 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.

                                                                     (Continued)

                                       25
<PAGE>


REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements



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

        (e)   Investment Securities, Mortgage-Backed Securities, and  Investment
        in Limited Partnership

        The  Company  classifies its debt and equity  securities in one of three
        categories: trading, available for sale or held to maturity.

        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, 1998, 1997, and 1996.

        Securities available for sale include securities that management intends
        to use as part of its  asset/liability  strategy  or that may be sold in
        response to changes in interest  rate,  changes in  prepayment  risk, or
        similar  factors.  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 on trade date.

        The  investment  in limited  partnership  is  recorded  using the equity
        method of accounting.

        (f)   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.

        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.

        Under the Company's  credit  policies and practices,  all nonaccrual and
        restructured loans, excluding consumer loans and residential real estate
        loans classified as nonacrrual, are considered impaired loans. A loan is
        considered impaired when, based on current information and events, it is
        probable  that a creditor  will be unable to  collect  all  amounts  due
        according  to  the  contractual  terms  of  the  loan  agreement.   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.

        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.

                                                                     (Continued)

                                       26
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements



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

        (g)   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.

        (h)   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.

        (i)   Impairment  of  Long-Lived  Assets and for Long-Lived Assets to be
        Disposed of

        The Company reviews long-lived assets for impairment  whenever events or
        changes in  circumstances  indicate that the carrying amount of an asset
        may not be recoverable.

        (j)   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.

        (k)   Stock-Based Compensation

        As permitted by Statement of Financial  Accounting  Standards (SFAS) No.
        123,  Accounting for  Stock-Based  Compensation,  the Company 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,  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.

        (l)   New Accounting Standards

        In July 1997,  the Financial  Accounting  Standards  Board (FASB) issued
        SFAS  No.  130,  Reporting   Comprehensive   Income  (SFAS  130),  which
        establishes  standards for reporting and display of comprehensive income
        and  its  components  in  a  full  set  of  general  purpose   financial
        statements.  The statement  requires that all items that are required to
        be recognized under accounting  standards as components of comprehensive
        income be disclosed in the financial statements. Comprehensive Income is
        defined as the change in equity  during a period from  transactions  and
        other events from nonowner sources. Comprehensive income is the total of
        net income and other comprehensive income. Other comprehensive income is
        anticipated to be primarily  comprised of unrealized gains and losses on
        securities  available  for sale.  SFAS 130 is effective for fiscal years
        beginning after December 15, 1997.  Management  adopted SFAS 130 on July
        1, 1998 and will report  comprehensive  income in statements  issued for
        financial  reporting  periods  occurring  during the year ended June 30,
        1999.

                                                                     (Continued)

                                       27
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements


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

        In February 1998, the FASB issued SFAS No. 132,  Employers'  Disclosures
        about  Pension  and Other  Postretirement  Benefits  (SFAS  132),  which
        revises  current  disclosure  requirements  for employers'  pensions and
        other  retiree  benefits.  SFAS 132 will have no effect on the financial
        position  or results of  operations  of the  Company,  however,  it will
        impact disclosures in the financial  statements in future periods.  SFAS
        132 is effective for fiscal years beginning after December 15, 1997.

        In June 1998,  the FASB issued SFAS No. 133,  Accounting  for Derivative
        Instruments  and  Hedging   Activities  (SFAS  133),  which  establishes
        accounting and reporting standards for derivative instruments, including
        certain derivative instruments embedded in other contracts (collectively
        referred to as  derivatives),  and for hedging  activities.  SFAS 133 is
        effective for all fiscal  quarters of fiscal years  beginning after June
        15, 1999.  Management is currently studying the impact of adopting  SFAS
        133.

        (m)   Earnings Per Share

        In February 1997, the FASB issued SFAS No. 128, Earnings per Share (SFAS
        128).  SFAS 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  128  supersedes  the
        standards for computing EPA  previously  found in Accounting  Principles
        Board (APB) Opinion No. 15, Earnings per Share. The Company adopted SFAS
        128 effective  for periods  ending  December 31, 1997.  All prior period
        earnings per share have been restated in accordance with SFAS 128.

        The following  tables  illustrate  the  calculation of basic and diluted
        earnings per share for the twelve months ended June 30, 1998,  1997, and
        1996:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

       For the year ended:             June 30, 1998                     June 30, 1997                     June 30, 1996
                              --------------------------------  --------------------------------  --------------------------------
                                         Weighted      Per                 Weighted      Per                  Weighted      Per
                                         average      share                 average     share                 average      share
                              Income      shares      amount     Income     shares      amount     Income      shares      amount
       ----------------------------------------------------------------------------------------------------------------------------
       <S>                  <C>          <C>          <C>     <C>            <C>          <C>   <C>          <C>             <C> 
       Net income:          $ 425,335                         $  251,500                        $  462,432

       Basic EPS:
       Income available
          to common
          stockholders        425,335      817,109      .52      251,500      933,377      .27     462,432    1,015,053       .46

       Effect on Dilutive
           Securities:
       Options on
          common stock                      23,173                              4,070                                 -
       Unvested
           restricted                       19,159                             24,559                            12,450
           stock awards
       ----------------------------------------------------------------------------------------------------------------------------

                                            42,332                             28,629                            12,450

       Dilutive EPS
       Income available to
          common
           stock-holders
           plus
          assumed con-      $ 425,335      859,441      .49   $  251,500      962,432      .26  $  462,432   1,027,503        .45
          versions
       ----------------------------------------------------------------------------------------------------------------------------

</TABLE>
                                                                     (Continued)

                                       28
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

(3)     Securities Available for Sale

        Securities  available for sale at June 30, 1998 and 1997 are  summarized
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                    June 30, 1998
                                                          --------------------------------------------------------------------
                                                                               Gross            Gross
                                                            Amortized        unrealized       unrealized       Approximate
                                                              cost             gains            losses         market value
  ----------------------------------------------------------------------------------------------------------------------------

          <S>                                          <C>                      <C>             <C>             <C>      
          Investment securities:
           U.S. Government agency securities            $     5,152,897           13,665            (937)         5,165,625
           U.S. Treasury notes                                3,799,561            2,290          (3,976)         3,797,875
           Municipal bonds                                      831,996                -          (1,996)           830,000
  ----------------------------------------------------------------------------------------------------------------------------

          Total investment securities                   $     9,784,454           15,955          (6,909)         9,793,500
  ----------------------------------------------------------------------------------------------------------------------------

          Mortgage-backed securities:
           GNMA certificates                                  1,171,238           41,920            (112)         1,213,046
           FHLMC certificates                                29,060,047          154,355         (37,600)        29,176,802
           FNMA certificates                                  3,495,087           52,240               -          3,547,327
  ----------------------------------------------------------------------------------------------------------------------------

          Total mortgage-backed securities              $    33,726,372          248,515         (37,712)        33,937,175
  ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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 securities            $     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 securities:
           FHLMC certificates                                 8,143,694            9,939          (3,881)         8,149,752
  ----------------------------------------------------------------------------------------------------------------------------

          Total mortgage-backed 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, 1998, 1997, and 1996, were $1,011,469,  $999,376, and $0,
        respectively.  Gross  realized gains from the sale of securities for the
        years ended June 30, 1998, 1997, and 1996 were $42,652,  $2,863, and $0,
        respectively.  Gross realized losses from the sale of securities for the
        years  ended June 30,  1998,  1997,  and 1996,  were  $911,  $0, and $0,
        respectively.

        Accrued   interest   receivable  on   securities   available  for   sale
        aggregated   $355,164   and  $212,930  at  June  30,  1998   and   1997,
        respectively.

                                                                     (Continued)

                                       29
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        The  carrying  amount  and   approximate   market  value  of  investment
        securities and mortgage-backed and related securities available for sale
        at June 30, 1998 and 1997, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------

                                                    June 30, 1998                        June 30, 1997
                                          ----------------------------------   ----------------------------------
                                              Amortized      Approximate           Amortized       Approximate
                                                cost          market value            cost         market value
-----------------------------------------------------------------------------------------------------------------

<S>                                          <C>              <C>                  <C>              <C>
      Due within one year                    $ 7,940,686        7,945,510                    -                -
      Due after one year through five years   11,876,970       11,973,559            1,998,189        1,990,938   
      Due after five years through ten years  21,718,570       21,823,030           13,138,039       13,140,064   
      Due after ten years                      1,974,600        1,988,576                    -                -  
-----------------------------------------------------------------------------------------------------------------

                                             $43,510,826       43,730,675           15,136,228       15,131,002
-----------------------------------------------------------------------------------------------------------------
</TABLE>

        Nontaxable  interest  income  on  securities   available  for  sale  and
        securities  held to maturity was $41,998,  $67,546,  and $60,213 for the
        years ended June 30, 1998, 1997, and 1996, respectively.


(4)     Securities Held to Maturity

        Securities held to maturity 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                 $     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              -             299,961
             FHLMC certificates                                 9,358,524         121,853        (16,893)          9,463,484
             FHLMC collateralized mortgage
               obligations                                         58,548           3,297              -              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)

                                       30
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     During the third quarter of fiscal 1998, the Company  determined that it no
     longer had the intent to hold its securities classified as held to maturity
     to the actual  maturity date of the securities.  Therefore,  it transferred
     all the  remaining  securities  in the held to  maturity  portfolio  to the
     available for sale portfolio.  The fair value of securities  transferred to
     "available for sale" at the date of transfer was $20,848,776 with amortized
     cost of $20,596,006 and unrealized  holding gains,  gross and net of taxes,
     of $249,044 and $149,426, respectively. The Company does not intend to hold
     securities classified as "held to maturity" in the foreseeable future.

     There were no sales of securities held to maturity for the years ended June
     30, 1998, 1997, or 1996.

     Accrued  interest  receivable  on  securities  held to maturity  aggregated
     $270,226 at June 30, 1997.

(5)     Loans Receivable

        Loans receivable at June 30, 1998 and 1997 are summarized as follows:

--------------------------------------------------------------------------------
                                            
                                                1998                1997
--------------------------------------------------------------------------------
                                            
Loans secured by real estate:               
        Residential one-to-four family     $24,261,342           18,577,418
        Multifamily                          1,471,862              173,594
        Commercial                           1,375,388              679,968
        Agricultural                           112,500              150,000
        Residential construction               463,500              502,000
        Multifamily construction                     -              980,000
Other consumer loans                           182,405               21,000
Loans on deposits                              255,494              133,033
Commercial                                   1,236,260              714,869
Agricultural operating line of credit        2,793,024              425,000
--------------------------------------------------------------------------------
Total                                       32,151,775           22,356,882
--------------------------------------------------------------------------------
                                            
Deferred loan fees and discounts               (29,043)             (15,765)
Loans in process                            (2,876,948)          (1,361,544)
Allowance for losses                          (251,034)            (213,034)
--------------------------------------------------------------------------------
                                            
Net loans                                  $28,994,750           20,766,539
--------------------------------------------------------------------------------
                                            
     Accrued  interest  receivable on loans receivable at June 30, 1998 and 1997
     was $192,734 and $125,682, respectively.

                                                                     (Continued)

                                       31
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     There were no  nonperforming  loans for the years  ended June 30,  1998 and
     1997. The following is a summary of  nonperforming  loans as of and for the
     year ended June 30, 1996:

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

                                                                        1996
--------------------------------------------------------------------------------

     Impaired loans:
        Nonaccrual                                                    $        -
        Restructured                                                           -
--------------------------------------------------------------------------------
                                                                               -
--------------------------------------------------------------------------------

     Other nonperforming loans:
        Nonaccrual                                                        89,153
        Restructured                                                           -
--------------------------------------------------------------------------------

                                                                          89,153
--------------------------------------------------------------------------------

     Total nonperforming loans                                          $ 89,153
--------------------------------------------------------------------------------

     Scheduled interest under original terms                               2,946
     Actual interest recognized                                                -
--------------------------------------------------------------------------------

     Net interest lost on nonperforming loans                          $   2,946
--------------------------------------------------------------------------------


     The average balance of impaired loans during each of the fiscal years ended
     June 30, 1998 and 1997 was $0.

     There was no  allowance  for losses on impaired  loans at June 30, 1998 and
     1997.

     The aggregate  amount of loans to directors  and executive  officers of the
     Company was $244,602,  $231,803,  and $237,177, at June 30, 1998, 1997, and
     1996, respectively. Activity with respect to these loans during fiscal 1998
     included  loan   originations  of  $159,349  and  repayments  of  $137,417,
     including both principal and interest. Activity with respect to these loans
     during  fiscal  1997  included  loan   originations  of  $33,000  and  loan
     repayments of $59,842, including both principal and interest. Activity with
     respect to these loans during fiscal 1996 included loan  originations of $0
     and loan repayments of $16,962, including both principal and interest. 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  $2,197,996  and  $402,000  as  of  June  30,  1998  and  1997,
     respectively.  The interest rates on these commitments ranged from 7.25% to
     8.8% and 8% to 9% for June 30, 1998 and 1997, respectively.

     There were no material  commitments to lend  additional  funds to customers
     whose loans were  classified  as nonaccrual at June 30, 1998, as there were
     no nonaccrual loans at June 30, 1998.

     There were no loans at June 30, 1998 and 1997,  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.

                                                                     (Continued)


                                       32
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

(6)  Allowance for Losses on Loans Receivable

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

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

     Balance at June 30, 1995                                       $    213,034

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

     Balance at June 30, 1996                                            213,034

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

     Balance at June 30, 1997                                            213,034

        Provision for losses                                              38,000
        Charge-offs and recoveries                                             -
--------------------------------------------------------------------------------

     Balance at June 30, 1998                                         $  251,034
--------------------------------------------------------------------------------


(7)  Premises and Equipment

     A summary  of  premises  and  equipment  at June 30,  1998 and 1997,  is as
     follows:

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

                                                            1998          1997
--------------------------------------------------------------------------------

     Land and office buildings                         $   620,976      310,927
     Furniture and equipment                               295,510      192,375
--------------------------------------------------------------------------------
     
                                                           916,486      503,302

     Less accumulated depreciation                        (319,619)    (291,235)
--------------------------------------------------------------------------------

                                                       $   596,867      212,067
--------------------------------------------------------------------------------

(8)  Real Estate

     Real estate  owned,  representing  real  estate  expected to be acquired in
     settlement  of loans,  totaled $0 and  $13,520  at June 30,  1998 and 1997,
     respectively.  The  allowance  for losses on real estate was $0 at June 30,
     1998  and  1997.  There  were no  provisions  for  losses  on real  estate,
     charge-offs,  or  recoveries  for the years ended June 30, 1998,  1997,  or
     1996.

                                                                     (Continued)

                                       33
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

(9)  Deposits

     Deposits and weighted-average  interest rates at June 30, 1998 and 1997 are
     summarized as follows:

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

                                        1998                          1997
                              ------------------------      --------------------
                                Amount             Rate      Amount         Rate
--------------------------------------------------------------------------------

     Passbook               $   868,463           2.64%   $   922,487      2.65%
     Money market accounts    6,743,864           3.83%     7,187,340      4.23
                              7,612,327                     8,109,827
---------------------------------------                    ----------

     Certificates of deposit:
         4.01-5.00%           2,577,293                       421,418
         5.01-6.00           24,147,498                    18,099,518
         6.01-7.00           13,604,445                    18,749,835
         7.01-8.00              160,243                       306,992
---------------------------------------                    ----------
                             40,489,479           5.90%    37,577,763      5.83%

Total deposits              $48,101,806           5.55%   $45,687,590      5.51%
--------------------------------------------------------------------------------

     Interest expense on deposits is summarized as follows:

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

                                             1998           1997           1996
--------------------------------------------------------------------------------
     Passbook                           $      23,696       25,130        33,968
     Money market accounts                    221,899      275,769       196,842
     Certificates of deposit                2,333,739    1,846,365     1,652,027
--------------------------------------------------------------------------------
                                        $   2,579,334    2,147,264     1,882,837
--------------------------------------------------------------------------------


     Certificates of deposit had the following remaining  maturities at June 30,
     1998 and 1997:

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

                                        1998                          1997
                         -----------------------   -----------------------------
                                        Weighted                     Weighted
                                        average                      average
                           Amount         rate         Amount         rate
--------------------------------------------------------------------------------

0-6 months               $16,822,782    5.82%       $16,655,356       5.70%
7-12 months                9,467,884    5.87         11,031,181       5.84
13-36 months              13,175,201    6.01          9,174,681       6.04
Over 36 months             1,023,612    6.21            716,545       6.00
------------------------------------                 ----------

                         $40,489,479    5.90        $37,577,763       5.83%
------------------------------------                 ----------

     The Company had $15,767,539 and $13,909,498 of certificates of deposit with
     balances of $100,000 or more at June 30, 1998 and 1997, respectively.

                                                                     (Continued)
                                       34
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     At June 30,  1998  and  1997,  investment  securities  and  mortgage-backed
     securities   with  an  approximate   carrying  value  of  $23,244,000   and
     $20,353,000, respectively, were pledged as collateral for certain deposits,
     including  approximately  $17,147,000  and  $17,969,000,  respectively,  of
     public deposits.

     At June 30, 1998 and 1997,  the  aggregate  amount of deposits by directors
     and executive  officers totaled $243,621 and $322,029,  respectively.  Such
     deposits  were  accepted in the  ordinary  course of  business  with normal
     interest rates, interest payment terms, and maturities.


(10) Federal Home Loan Bank Advances

     At June 30,  1998 and 1997,  the  Bank's  Federal  Home  Loan  Bank  (FHLB)
     advances consisted of the following:

--------------------------------------------------------------------------------
       
                                             1998                1997
                                  ----------------------    --------------------
       
       Year of maturity              Amount       Rate        Amount       Rate
--------------------------------------------------------------------------------
       
       1998                       $ 2,366,401     5.87%     2,500,000      6.08%
       1999                           348,257     6.05          -           -   
       2000                         1,369,929     6.25      1,000,000      6.33
       2001                           392,950     6.05
       2002                           417,404     6.05
       2003                           443,379     6.05
       2004                           470,971     6.05
       2005                           500,281     6.05
       2006                           531,414     6.05
       2007                           564,486     6.05
       2008                         5,599,615     5.42
       2009                           636,931     6.05
       2010                           676,570     6.05
       2011                           718,675     6.05
       2012                           763,401     6.05
       2013                           399,336     6.05
---------------------------------------------               ---------
       
                                   16,200,000     5.83%     3,500,000      6.15%
       
       Open line of credit              -          -            -           - 
--------------------------------------------------------------------------------

     At June 30,  1998 and 1997,  the  advances  and open  line of  credit  were
     collateralized  by the Bank's  FHLB stock and  investments  with a carrying
     value  of   approximately   $835,000  and   $10,942,000  and  $333,500  and
     $7,424,000,  respectively.  At June 30, 1998, the Bank has also pledged its
     portfolio of 1-4 family  non-delinquent loans as additional  collateral for
     advances with an unpaid principal balance of approximately $17,218,000. The
     Bank has a  $1,000,000  line of credit with the FHLB which was not drawn on
     at June 30, 1998 and 1997.  The Bank has the  ability to borrow  additional
     amounts given the availability of collateral  available for pledging to the
     FHLB. The Bank's advances  include $5 million in advances with various call
     features.  If called, the FHLB will provide alternative funding at the then
     current market interest rates and terms.

                                                                     (Continued)

                                       35
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

(11) Income Taxes

     Income tax expense  (benefit) for the years ended June 30, 1998,  1997, and
     1996, is composed of the following:

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

                                                  1998       1997      1996
--------------------------------------------------------------------------------

     Current:
        Federal                                $ 181,345    141,694   120,844
        State                                     66,742     51,828    43,942
--------------------------------------------------------------------------------

     Total current                              248,087     193,522   164,786
--------------------------------------------------------------------------------

     Deferred:
        Federal                                  (3,924)    (43,066)   34,295
        State                                    (1,254)    (13,788)   11,431
--------------------------------------------------------------------------------

     Total deferred                              (5,178)    (56,854)   45,726
--------------------------------------------------------------------------------

                                             $  242,909     136,668   210,512
--------------------------------------------------------------------------------


     The reasons for the  difference  between the effective  income tax rate and
     the statutory federal income tax rate are as follows:

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

                                                           1998   1997   1996
--------------------------------------------------------------------------------

     Federal "expected" income tax rate                    34.0%  34.0%  34.0%
     State income taxes, net of federal income tax benefit  6.5    6.5    6.5
     Increase in base year tax bad debt reserve             0.0    0.0   (6.3)
     Tax-exempt interest income                            (4.1)  (5.3)  (3.0)
     Other, net                                             0.0    0.0    0.1
--------------------------------------------------------------------------------

     Effective income tax rate                             36.4%  35.2%  31.3%
--------------------------------------------------------------------------------

                                                                     (Continued)

                                       36
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     The tax effects of temporary differences that give rise to the deferred tax
     assets and  deferred  tax  liabilities  at June 30,  1998 and 1997,  are as
     follows:

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

                                                              1998         1997
--------------------------------------------------------------------------------

     Deferred tax assets:
        Discounts on mortgage-backed and related securities  $ 20,856     26,175
        Allowance for losses on loans receivable                2,651      2,651
        Unrealized loss on available for sale securities            0      2,090
        Other                                                   1,599        -  
--------------------------------------------------------------------------------

     Gross deferred tax assets                                 25,106     30,916

     Valuation allowance                                           -         -
--------------------------------------------------------------------------------

     Deferred tax assets, net                                 25,106      30,916

     Deferred tax liabilities:
        Unrealized gain on available for sale securities      87,940         -  
        Accrual to cash conversion                            82,695      95,564
        FHLB stock                                            43,216      50,500
        Premises and equipment                                21,364      10,109
--------------------------------------------------------------------------------

     Gross deferred tax liabilities                          235,215     156,173
--------------------------------------------------------------------------------

     Net deferred tax liability                             $210,109     125,257
--------------------------------------------------------------------------------

     No  valuation  allowance  was  required for deferred tax assets at June 30,
     1998 or 1997.

     Retained earnings at June 30, 1998, 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.


(12) Employee Benefits

     (a)  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.

                                                                     (Continued)
                                       37

<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     Net  periodic  pension  expense for the years  ended June 30  includes  the
     following components:

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

                                                       1998      1997      1996
--------------------------------------------------------------------------------

     Service cost-benefits earned during the period $ 31,734    28,076   26,494
     Interest cost on projected benefit obligation    63,131    57,824   51,730
     Actual return on plan assets                    (76,688)  (63,728) (55,934)
     Net amortization and deferral                    (4,324)      438      438
--------------------------------------------------------------------------------

     Net periodic pension expense                   $ 13,853    22,610   22,728
--------------------------------------------------------------------------------


     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:

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

                                                       1998      1997      1996
--------------------------------------------------------------------------------

     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

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

     The  following  table sets forth the Plan's  funded  status and the amounts
     recognized in the Company's balance sheet at June 30:

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

                                                            1998      1997
--------------------------------------------------------------------------------

     Actuarial present value of benefit obligations:
        Vested accumulated benefit obligation            $  732,406   676,571
        Nonvested accumulated benefit obligation                910       133
--------------------------------------------------------------------------------

     Total accumulated benefit obligation                   733,316   676,704

     Effect of projected future salary increases            155,302   137,234
--------------------------------------------------------------------------------

     Projected benefit obligation                           888,618   813,938

     Plan assets at fair value                            1,057,116   889,838
--------------------------------------------------------------------------------

     Plan assets in excess of projected benefit obligation  168,478    75,900

     Unrecognized prior service cost                         14,112    15,875
     Unrecognized gain from past experience
        different from that assumed                        (174,284)  (77,515)

     Unrecognized net transition asset being 
        amortized over 15 years                              (3,982)   (5,307)
--------------------------------------------------------------------------------

     Prepaid pension cost                                    $4,344     8,953
--------------------------------------------------------------------------------

                                                                     (Continued)

                                       38
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     (b)  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 1998,
     1997, or 1996.

     (c)  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 $111,163, $117,125, and $123,086
     to the ESOP during the fiscal years 1998, 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 committed to
     be 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 $103,457,  $84,650,  and $77,021 for fiscal years 1998,  1997 and 1996,
     respectively.

     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 years ended
     June 30:

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

                                                       1998      1997      1996
--------------------------------------------------------------------------------

     Shares allocated beginning of year               12,420     4,140      -   
     Shares allocated during year                      8,280     8,280     4,140
     Unreleased shares                                62,048    70,328    78,608

     Total ESOP shares                                82,748    82,748    82,748

     Fair value of unreleased shares at June 30    $ 810,502   694,974   688,829
--------------------------------------------------------------------------------

     (d)  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 1998, 1997, and 1996, were  compensation and employee  benefits
     expense of $86,625,  $86,625,  and  $39,703,  respectively,  related to the
     MSBP.

                                                                     (Continued)

                                       39
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     (e)  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.

     On June 10, 1997,  the Board of Directors of the Company  approved the 1997
     Director's  Stock Option Plan.  The Plan granted 38,472 shares or 4% of its
     then  961,875  outstanding  shares to the  directors  of the  Company at an
     exercise  price of $11.0625 per share.  Each director  received an award of
     6,412 shares. The awards vested in entirety on August 1, 1997. In addition,
     vested  options  are  exerciseable  for a period  ending 10 years after the
     grant date.

     As of June 30, 1998, no stock options have been  exercised or forfeited.  A
     summary of stock option activity is detailed as follows:

--------------------------------------------------------------------------------
                                                                        Weighted
                                                  Options               average
                                                 available    Options   exercise
                                                 for grant  outstanding  price
--------------------------------------------------------------------------------

     June 30, 1995                                     -           -       -
     1995 stock option plan adopted               112,500          -       -
     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
     1997 Director's stock option plan adopted     38,472          -       -    
     Granted June 10, 1997  (weighted average 
       fair value $5.26 per option)               (38,472)       38,472  11.0625
--------------------------------------------------------------------------------

     June 30, 1997                                 14,600       136,372  10.2270
       (No activity)                                 -             -       -  
     June 30, 1998                                 14,600       136,372  10.2270
--------------------------------------------------------------------------------

     The number of options exerciseable at June 30, 1998 was 76,552 options with
     a weighted average exercise price of $10.4627.

                                                                     (Continued)

                                       40
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     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 and 1997  Director's  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:

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

                                   Fiscal year    Fiscal year     Fiscal year
                                     ending         ending          ending
                                   June 30, 1998  June 30, 1997   June 30, 1996
--------------------------------------------------------------------------------

     Net income:
        As reported                $  425,335       251,500          462,432
        Pro forma                     252,023       202,396          442,360
     Basic earnings per share:
        As reported                       .52           .27              .46
        Pro forma                         .31           .22              .44
--------------------------------------------------------------------------------

     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.

     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  For options granted in  For options granted in
                              accordance with 1997    accordance with 1995    accordance with 1995
                              Director's Stock Option   Stock Option Plan       Stock Option Plan
                                 Plan granted on            granted on             granted on
                                 June 10, 1997              April 9, 1997        January 17, 1996
------------------------------------------------------------------------------------------------------

<S>                                   <C>                      <C>                     <C>  
   Risk-free interest rate            6.46%                    7.07%                   5.78%
   Expected life                      10 years                 10 years                10 years
   Expected volatility                12.00%                   12.00%                  12.00%
   Expected dividends                 None                     None                    None
------------------------------------------------------------------------------------------------------
</TABLE>

                                                                     (Continued)

                                       41
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

     (13) Federal Home Loan Bank  Investment,  Retained  Earnings and Regulatory
          Capital Requirements

     The Bank, 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 Bank is
     required to maintain  cash and other liquid assets in an amount equal to 4%
     of its deposit accounts and other obligations due within one year. The Bank
     has met these requirements.

     The Bank is subject to various regulatory capital requirements administered
     by  the  federal  banking   agencies.   Failure  to  meet  minimum  capital
     requirements  can  initiate  certain   mandatoryand   possibly   additional
     discretionaryactions by regulators that, if undertaken, could have a direct
     material effect on the Bank's financial statements.  Under capital adequacy
     guidelines and the regulatory  framework for prompt corrective  action, the
     Bank  must meet  specific  capital  guidelines  that  involve  quantitative
     measures of the Bank's assets,  liabilities and certain  off-balance  sheet
     items as  calculated  under  regulatory  accounting  practices.  The Bank'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 Bank 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, 1998,  that the Bank meets all capital  adequacy  requirements  to
     which it is subject.

     As of June 30,  1998 and 1997,  the most recent  notification  from the OTS
     categorized  the Bank as 'well  capitalized.'  There are no  conditions  or
     events since that  notification  that management  believes have changed the
     Bank's category.

                                                                     (Continued)

                                       42
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        The Bank's actual  capital  amounts and ratios are also presented in the
table (dollars in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                                              To be Well 
                                                                                           Capitalized Upon
                                                                                           Prompt Corrective
                   Actual                 Requirement            Excess Capital            Actions Provisions
           ------------------------  -----------------------  -----------------------   -------------------------
                        Percent                  Percent of                Percent                   Percent of
                        of assets                assets (1)                of assets                 assets (1)
            Amount         (1)        Amount                    Amount        (1)         Amount
-----------------------------------------------------------------------------------------------------------------
<S>      <C>               <C>     <C>                <C>    <C>             <C>            <C>          <C>   
Bank's
net
worth    $     8,502


Less:
  AFS
  market
  valuation      132
           ----------

Tangible
capital        8,370       11.19%       1,122         1.50%       7,248      9.69%            N/A           N/A
           ----------

Core
capital
(2)            8,370       11.19%       2,244         3.00%       6,126      8.19%          3,751         5.00%
           ----------

Plus:

Allowable
portion
of
general
allowance        
for loan
losses           251
           ----------

Risk-based
capital  $     8,621       31.66%  $    2,179         8.00%  $    6,442      23.66%         2,723        10.00%
           ----------

</TABLE>

(1)   Based on the Bank'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  Bank  is also
      required  to hold  core  capital  equal to or  greater  than  6.00% of its
      risk-weighted assets, or $1,634 at June 30, 1998.
--------------------------------------------------------------------------------

(14) SAIF Assessment

     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.

     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.

                                                                     (Continued)

                                       43
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        DIFA proposed that the Bank  Insurance  Fund (BIF) 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 1998,  the Company  repurchased  a total of
        93,782 shares,  or 9.75%,  of its 961,875 shares  outstanding as of June
        30,  1997,  at an average  price of $12.15 per share.  During the fiscal
        year  ended  June 30,  1997,  the  Company  repurchased  106,875  of its
        outstanding common stock at an average price of $11.48 per share. During
        the fiscal year ended June 30,  1996,  the Company  repurchased  101,250
        shares of its outstanding common stock, at an average price per share of
        $9.53. As a result of these stock repurchase  programs,  the Company has
        now outstanding 868,093 shares of common stock. The following summarizes
        the Company's  common stock  repurchases  during the twelve months ended
        June 30, 1998:


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

                                                       Shares         Price   
     Settlement date                                 Purchased     per share
--------------------------------------------------------------------------------

     September 11, 1997                                28,000       $11.75
     September 12, 1997                                20,093        11.75
     November 28, 1997                                 24,707        12.1250
     December 4, 1997                                   2,000        12.1250
     January 6, 1998                                    6,500        13.0000
     January 12, 1998                                  12,482        13.3125
--------------------------------------------------------------------------------

     Average price per share:                                       $12.1514
--------------------------------------------------------------------------------

        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)

                                       44
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        The contract amount of these financial  instruments at June 30, 1998 and
1997, is as follows:

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

                                                          Contract amount
                                                   -----------------------------
                                                         1998           1997
--------------------------------------------------------------------------------

          Financial instruments whose contract 
          amount represents risk:
            Commitments to extend credit           $    2,197,996      402,000
            Letter of credit                               20,000         -
--------------------------------------------------------------------------------

        Commitments  to extend  credit and the  letter of  credit,  collectively
        referred  to as  commitments,  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,  1998 and 1997,  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)

                                       45

<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        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
                                             ---------------------------------------------------------------------------------------
                                                                1998                                         1997
                                             -------------------------------------------  ------------------------------------------
                                               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         $     2,009,228      2,009,228                      763,792         763,792
         Securities available for sale          43,730,675     43,730,675                   15,131,002      15,131,002
         Securities held to maturity                  -               -                     24,269,460      24,481,726
         Loans receivable, net (1)              28,994,750     29,500,683                   20,766,539      21,248,657
          FHLB stock                               835,000        835,000                      333,500         333,500
         Accrued interest receivable               547,898        547,898                      613,357         613,357

      Financial liabilities:
         Deposits                               48,101,806     48,333,647                   45,687,590      45,864,695
         FHLB Advances                          16,200,000     15,912,088                    3,500,000       3,496,847
         Accrued interest payable                  631,168        631,168                      405,623         405,623

      Off-balance sheet financial instruments:
             Commitments to
                extend credit                         -         2,217,996    2,217,996            -              8,479      402,000
    
      ------------------------------------------------------------------------------------------------------------------------------

</TABLE>

        (1) The carrying amount of loans  receivable is reported net of $251,034
        and $213,034 in allowance for losses on loans at June 30, 1998, and June
        30, 1997, respectively

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

        (a)   Cash and Cash Equivalents

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

        (b)   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.

        (c)   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, agriculture,  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.

                                                                     (Continued)

                                       46

<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        (d)   FHLB Stock

        The carrying amount of FHLB stock approximates its fair value.

        (e)   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.

        (f)   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, 1998 and 1997,
        for deposits with maturates  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.

        (g)   FHLB  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.

        (h)   Accrued Interest Payable

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

        (i)   Commitments to Extend Credit

        The fair value of  commitments to extend credit is based on the proposed
        carrying value. All loan commitments are made at current market interest
        rates. Therefore, the proposed carrying value approximates fair value.


(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 .

                                                                     (Continued)

                                       47
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

        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)    Business Segment Performance Disclosure

        SFAS No. 131,  Disclosures  about  Segments of an Operation  and Related
        Information,  requires  the  disclosure  of  financial  and  descriptive
        information   about  the  operating   segments  of  a  public   business
        enterprise. For purposes of this disclosure, Redwood Financial, Inc. has
        deemed its  operating  segments to follow its corporate  structure.  The
        rationale for this segmentation is a result of the differing operational
        purposes  of its  corporate  entities as well as the  simplicity  of the
        Company's corporate structure.

        To this extent,  the Company has determined  that it has three operating
        segments.   These  include  (1)  the  parent  holding  company,  Redwood
        Financial,  Inc., (2) the insured financial institution,  HomeTown Bank,
        and (3) a subsidiary of the Bank,  Redwood Falls Federal Services,  Inc.
        (the Service Corporation).

        Following is a brief description of the three operating segments:

        Holding Company: Redwood Financial, Inc. was organized in 1995 primarily
        to acquire and hold the common stock of the Association.  This continues
        to be the Holding  Company's  primary purpose.  The Holding Company also
        contributes to the operational  performance of the consolidated  Company
        through  (1)  retention  and  servicing  of three  loans  which were not
        eligible  for  investment  within the Bank's  operating  segment  due to
        regulatory restrictions, (2) management of a small investment portfolio,
        including an investment in a limited partnership,  and (3) providing and
        incurring  expense as a result of employee  benefits  available  to Bank
        personnel for the remuneration and retention of Bank personnel.

        The  Bank:   HomeTown  Bank  provides   standard   banking  services  to
        communities  in Redwood  and  Renville  Counties,  Minnesota,  including
        lending and deposit  products  services.  The Bank is the largest of the
        consolidated Company's operating segments.

        The Service  Corporation:  Redwood  Falls  Federal  Services,  Inc. is a
        Minnesota  corporation  organized  in  1993  for  the  sole  purpose  of
        providing insurance sales separate from the Bank as a result of previous
        federal  regulatory  requirements.  These  requirements  have since been
        lifted and the Service  Corporation  has been inactive  since June 1996.
        The Service  Corporation  provided no contribution  to the  consolidated
        Company's operating performance for the fiscal years ended June 30, 1998
        and 1997.

        The following table  summarizes the  contribution of each segment to the
        operating  performance of the consolidated  Company for the fiscal years
        ended June 30, 1998, 1997, and 1996.

                                                                     (Continued)

                                       48
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                             For the year ended June 30, 1998                 For the year ended June 30, 1997      
                                     ------------------------------------------------  ---------------------------------------------
                                     Unconsolidated     Intercompany  Consolidated     Unconsolidated   Intercompany  Consolidated  
                                     segment results    eliminations  segment results  segment results  eliminations segment results
 -----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>             <C>                 <C>              <C>         <C>           

 Holding Company
 Interest income:
   Loans                                   78,133                           78,133              48,784                     48,784   
   Investment and mortgage-
     backed and related securities         26,778                           26,778             100,520                    100,520   
              Other (1)                    45,602         (45,602)               -              51,703       (24,578)      27,125   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                                 150,513         (45,602)         104,911             201,007       (24,578)     176,429   

 Noninterest income:
   Gain on sale of investments                  -                                -               2,863                      2,863   
   Other noninterest income                     -                                -                   -                          -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                                       -               -                -               2,863             -        2,863   

 Noninterest expense:
   Compensation and
     employee benefits                    190,282                          190,282             171,275                    171,275   
   Income tax benefit                     (78,829)                         (78,829)            (77,167)                   (77,167)  
   Other (2)                              107,872         (48,000)          59,872             193,534       (48,000)     145,534   
 -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    
 Subtotal                                 219,325         (48,000)         171,325             287,642       (48,000)     239,642   
 -----------------------------------------------------------------------------------------------------------------------------------

 Segment total                            (68,812)          2,398          (66,414)            (83,772)       23,422      (60,350)  
 -----------------------------------------------------------------------------------------------------------------------------------

 Total assets-segment                  11,759,177                       11,759,177          12,308,976                 12,308,976   
 -----------------------------------------------------------------------------------------------------------------------------------

 Bank
 Interest income:
   Loans                                1,993,373                        1,993,373           1,514,821                  1,514,821   
   Investment and mortgage-
     backed and related securities      2,567,773                        2,567,773           2,032,217                  2,032,217   
   Other                                   81,865                           81,865             146,150                    146,150   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                               4,643,011               -        4,643,011           3,693,188             -    3,693,188   

 Interest expense:
   Deposits                             2,624,936         (45,602)       2,579,334           2,171,842       (24,578)   2,147,264   
   Borrowings                             419,138                          419,138              38,485                     38,485   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                               3,044,074         (45,602)       2,998,472           2,210,327       (24,578)   2,185,749   

 Noninterest income:
   Gain on sale of investments             42,652                           42,652                   -                          -   
   Other noninterest income               137,512         (48,000)          89,512             101,616       (48,000)      53,616   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                                 180,164         (48,000)         132,164             101,616       (48,000)      53,616   

 Noninterest expense:
   Compensation and
     employee benefits                    649,378                          649,378             553,458                    553,458   
   Provision for loan losses               38,000                           38,000                   -                          -   
   Loss on sale of investments                911                              911                   -                          -   
   Income tax expense                     321,738                          321,738             213,835                    213,835   
   Other                                  274,927                          274,927             481,912                    481,912   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                               1,284,954               -        1,284,954           1,249,205             -    1,249,205   
 -----------------------------------------------------------------------------------------------------------------------------------

 Segment total                            494,147          (2,398)         491,749             335,272       (23,422)     311,850   
 -----------------------------------------------------------------------------------------------------------------------------------

 Total assets-segment                  75,022,442                       75,022,442          60,331,501                 60,331,501   
 -----------------------------------------------------------------------------------------------------------------------------------

 Service Corporation (3)
 Interest income:
   Other (4)                                                                     -                                              -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                                       -               -                -                   -             -            -   

 Noninterest income:
   Other noninterest income                                                      -                                              -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                                       -               -                -                   -             -            -   

 Noninterest expense:
   Other (5)                                                                     -                                              -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Subtotal                                       -               -                -                   -             -            -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Segment total                                  -               -                -                   -             -            -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Total assets-segment                           -                                -                   -                          -   
 -----------------------------------------------------------------------------------------------------------------------------------

 Total                                    425,335               -          425,335             251,500             -      251,500   
 -----------------------------------------------------------------------------------------------------------------------------------

 Total assets                          86,781,619               -       86,781,619          72,640,477             -   72,640,477   
 -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------
                                                 For the year ended June 30, 1996
                                        ----------------------------------------------
                                         Unconsolidated   Intercompany Consolidated
                                        segment results  eliminations segment results
 -------------------------------------------------------------------------------------
<S>                                       <C>               <C>          <C>       

 Holding Company
 Interest income:
   Loans                                        30,519                       30,519
   Investment and mortgage-
     backed and related securities             130,826                      130,826
              Other (1)                         39,394         (959)         38,435
 -------------------------------------------------------------------------------------

 Subtotal                                      200,739         (959)        199,780

 Noninterest income:
   Gain on sale of investments                       -                            -
   Other noninterest income                        959                          959
 -------------------------------------------------------------------------------------

 Subtotal                                          959            -             959

 Noninterest expense:
   Compensation and
     employee benefits                         116,725                      116,725
   Income tax benefit                                                            -
   Other (2)                                    63,895      (44,000)         19,895
 -------------------------------------------------------------------------------------
                                                                                  
 Subtotal                                      180,620      (44,000)        136,620
 -------------------------------------------------------------------------------------

 Segment total                                  21,078       43,041          64,119
 -------------------------------------------------------------------------------------

 Total assets-segment                       13,172,441                   13,172,441
 -------------------------------------------------------------------------------------

 Bank
 Interest income:
   Loans                                     1,333,064                    1,333,064
   Investment and mortgage-
     backed and related securities           1,781,102                    1,781,102
   Other                                       172,246                      172,246
 -------------------------------------------------------------------------------------

 Subtotal                                    3,286,412            -       3,286,412

 Interest expense:
   Deposits                                  1,884,432       (1,595)      1,882,837
   Borrowings                                                                    -
 -------------------------------------------------------------------------------------

 Subtotal                                    1,884,432       (1,595)      1,882,837

 Noninterest income:
   Gain on sale of investments                       -                            -
   Other noninterest income                    108,950      (45,800)         63,150
 -------------------------------------------------------------------------------------

 Subtotal                                      108,950      (45,800)         63,150

 Noninterest expense:
   Compensation and
     employee benefits                         532,134                      532,134
   Provision for loan losses                         -                            
   Loss on sale of investments                       -                            
   Income tax expense                          210,512                      210,512
   Other                                       326,933                      326,933
 -------------------------------------------------------------------------------------

 Subtotal                                    1,069,579            -       1,069,579
 -------------------------------------------------------------------------------------

 Segment total                                 441,351      (44,205)        397,146
 -------------------------------------------------------------------------------------

 Total assets-segment                       48,415,372                   48,415,372
 -------------------------------------------------------------------------------------

 Service Corporation (3)
 Interest income:
   Other (4)                                       636         (636)
 -------------------------------------------------------------------------------------

 Subtotal                                          636         (636)              -

 Noninterest income:
   Other noninterest income                      1,941                        1,941
 -------------------------------------------------------------------------------------

 Subtotal                                        1,941            -           1,941

 Noninterest expense:
   Other (5)                                     2,574       (1,800)            774
 -------------------------------------------------------------------------------------

 Subtotal                                        2,574       (1,800)            774
 -------------------------------------------------------------------------------------

 Segment total                                       3        1,164           1,167
 -------------------------------------------------------------------------------------

 Total assets-segment                                -                            -
 -------------------------------------------------------------------------------------

 Total                                         462,432            -         462,432
 -------------------------------------------------------------------------------------

 Total assets                               61,587,813            -      61,587,813
 -------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
            <S>  <C>
             Footnotes:
             (1) The Holding Company maintains substantially all of its cash in an interest bearing account at the Bank. The 
                   elimination reflects interest earned and paid on this account.
             (2) The Holding Company pays the Bank $4,000 per month for management services provided by the Bank to the Holding 
                   Company.
             (3) The Service Corporation has been inactive since June 1996 and has no assets as of June 30, 1996.
             (4) The Service Corporation maintained substantially all of its cash in an interest bearing account at the Bank. The 
                   elimination reflects interest earned and paid on this account.
             (5) The Service Corporation paid the Bank $1,800 per year for management services provided by the Bank to the Service 
                   Corporation.
</TABLE>

                                                                     (Continued)

                                       49
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

(20)   Redwood Financial, Inc. Finanical Information (Parent Company Only)

       The parent  companys  principal  assets  are  its investment in  the Bank
       and securities.  The following  are the  condensed  financial  statements
       for the  parent  company  only as  of and  for  the years  ended June 30,
       1998 and 1997.

       Condensed Balance Sheet
<TABLE>
<CAPTION>
                                                                                                 June 30,       June 30,
                                       Assets                                                      1998           1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>               <C>       
       Cash and cash equivalents                                                             $    1,172,127      2,122,649
       Securities held to maturity                                                                        -      1,274,607
       Securities available for sale                                                                375,000              -
       Loans receivable, net                                                                      1,340,118        500,269
       Investment in subsidiary                                                                   8,502,030      8,372,837
       Accrued interest receivable                                                                   17,789         35,479
       Other assets                                                                                 542,383         36,192
---------------------------------------------------------------------------------------------------------------------------

       Total assets                                                                          $   11,949,447     12,342,033
---------------------------------------------------------------------------------------------------------------------------


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

       Accrued expenses and other liabilities                                                        11,421              -
---------------------------------------------------------------------------------------------------------------------------

       Total liabilities                                                                             11,421              -
---------------------------------------------------------------------------------------------------------------------------

       Common stock                                                                                 112,500        112,500
       Additional paid-in capital                                                                 8,490,163      8,467,833
       Retained earnings, subject to certain restrictions                                         6,794,926      6,369,591
       Net unrealized gain (loss) on securities available for sale                                  131,909         (3,135)
       Unearned employee stock ownership plan shares                                               (463,264)      (529,504)
       Unearned management stock bonus plan shares                                                 (220,172)      (306,797)
       Treasury stock, at cost                                                                   (2,908,036)    (1,768,455)
---------------------------------------------------------------------------------------------------------------------------

       Total stockholders equity                                                                11,938,026     12,342,033
---------------------------------------------------------------------------------------------------------------------------

       Total liabilities and stockholders equity                                            $   11,949,447     12,342,033
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


       Condensed Statement of Income
<TABLE>
<CAPTION>
                                                                                    1998           1997           1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                  <C>            <C>    
       Gain on sale of investments available for sale                          $           -          2,863              -
       Interest income                                                               150,513        201,007        200,739
       Equity in earnings of subsidiary                                              494,147        335,271        433,884
       Compensation and employee benefits                                           (250,181)      (171,275)      (116,725)
       Other                                                                         (47,973)      (193,533)       (62,936)
---------------------------------------------------------------------------------------------------------------------------

       Earnings before income tax benefit                                            346,506        174,333        454,962

       Income tax benefit                                                             78,829         77,167          7,470
---------------------------------------------------------------------------------------------------------------------------

       Net earnings                                                            $     425,335        251,500        462,432
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                     (Continued)

                                      50
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------

        Condensed Statement of Cash Flows

                                                                                              Years ended
                                                                                                June 30,
                                                                             -----------------------------------------------
                                                                                 1998            1997             1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                 <C>              <C>    
        Operating activities:
          Net earnings                                                     $       425,335         251,500          462,432
          Adjustments to reconcile net earnings to cash
             provided by operating activities:
               Equity in earnings of subsidiary                                   (494,147)       (335,271)        (433,884)
               Amortization of premiums (discounts), net                              (395)         (1,028)          (1,092)
               (Increase) decrease in accrued interest receivable                   17,690          31,305          (66,784)
               Gain on sale of investments available for sale                         -             (2,863)            - 
               Amortization of unearned ESOP shares                                 66,240          66,240           66,240
               Earned ESOP priced above original cost                               22,330          10,816           10,781
               Earned management stock bonus plan shares                            86,625          86,625           39,703
               Increase (decrease) in accrued expenses and
                 other liabilities                                                  11,421         (15,405)          15,405
               Increase in other assets                                           (506,191)        (36,192)          (7,470)
----------------------------------------------------------------------------------------------------------------------------

        Net cash provided (used) by operating activities                          (371,092)         55,727           85,331
----------------------------------------------------------------------------------------------------------------------------

        Investing activities:
          Proceeds from maturities of investment securities
             held to maturity                                                      900,000       1,215,000            -    
          Purchases of investment securities available for sale                       -           (996,513)      (2,487,487)
          Proceeds from sales of investment securities available for sale             -            999,376            -   
          Increase in loans receivable, net                                       (839,849)        (24,911)        (475,358)
----------------------------------------------------------------------------------------------------------------------------

        Net cash provided by investing activities                                   60,151       1,192,952       (2,962,845)
----------------------------------------------------------------------------------------------------------------------------

        Financing activities:
          Adoption of ESOP                                                            -               -            (661,984)
          Dividend from Bank                                                       500,000       2,000,000             -   
          Proceeds from sale of common stock                                          -               -           8,549,361
          Purchase of Association stock                                               -               -          (3,943,688)
          Repurchase of common stock                                            (1,139,581)     (1,227,049)        (965,156)
----------------------------------------------------------------------------------------------------------------------------

        Net cash provided (used) by financing activities                          (639,581)        772,951        2,978,533
----------------------------------------------------------------------------------------------------------------------------

        Increase (decrease) in cash and cash equivalents                          (950,522)      2,021,630          101,019

        Cash and cash equivalents, beginning of year                             2,122,649         101,019             -        
----------------------------------------------------------------------------------------------------------------------------

        Cash and cash equivalents, end of year                             $     1,172,127       2,122,649          101,019
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                     

                                       51
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

(21)    Subsequent Event

        From July 1,  1998,  through  August 31,  1998,  the  investment  in the
        limited  partnership had incurred  losses.  The Company's share of these
        losses was approximately  $120,000.  Depending on the performance of the
        limited  partnership,  the losses may be  recognized  in the fiscal 1999
        financial statements.

                                                                     
                                       52
<PAGE>
REDWOOD FINANCIAL, INC. AND SUBSIDIARY



<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------

        Summarized quarterly financial data for fiscal 1998 and 1997 are as follows:

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

                                                                                Three months ended
                                                          ---------------------------------------------------------------
                                                            June 30,       March 31,       December 31,     September 30,
             Selected Operations Data                         1998            1998           1997               1997
-------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                  <C>             <C>               <C>      
           Interest income                              $     1,233,154      1,202,259       1,158,230         1,154,278
           Interest expense                                     788,140        758,725         752,020           699,587
-------------------------------------------------------------------------------------------------------------------------

           Net interest income                                  445,014        443,534         406,210           454,691

           Provision for loan losses                             24,000         14,000               -                 -
           Non-interest income                                   50,123         35,054          33,536            13,451
           Non-interest expense                                 301,884        287,441         318,496           267,548
           Income tax expense                                    60,838         65,270          42,097            74,704
-------------------------------------------------------------------------------------------------------------------------

           Net earnings                                 $       108,415        111,877          79,153           125,890
-------------------------------------------------------------------------------------------------------------------------

           Earnings per common sharebasic              $      .13            .14             .10               .15
           Earnings per common sharediluted                   .13            .13             .09               .14
</TABLE>



<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                                  -              -               -                 -
           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 sharebasic               $           .13            .14             .04              (.04)
           Earnings per common sharediluted                         .13            .13             .04              (.04)

</TABLE>


                                      53
<PAGE>

REDWOOD FINANCIAL, INC. AND SUBSIDIARY

<TABLE>
<CAPTION>

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

             Selected Financial                       June 30,          March 31,        December 31,       September 30,
               Condition Data                           1998               1998              1997               1997
---------------------------------------------------------------------------------------------------------------------------

<S>                                              <C>                      <C>               <C>                <C>       
           Total assets                          $      77,286,605         69,687,671        67,147,038         64,651,177
           Securities                                   43,730,675         38,332,752        39,997,129         40,510,502
           Net loans                                    28,994,750         26,905,925        23,374,423         22,356,259
           Deposits                                     48,101,806         48,668,957        46,979,232         45,780,689
           Stockholders' equity                         11,938,026         11,824,419        11,801,405         11,985,092

</TABLE>


<TABLE>
<CAPTION>
             Selected Financial                       June 30,          March 31,        December 31,       September 30,
               Condition Data                           1997               1997              1996               1996
---------------------------------------------------------------------------------------------------------------------------

<S>                                              <C>                      <C>               <C>                <C>       
           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

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

</TABLE>




                                       54