U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[x]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
       ACT OF 1934 For the fiscal year ended December 31, 1998

[ ]    TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
       ACT OF  1934 
       For the transition period from ___________________ to __________________

Commission file number:  0-27984

                       Ridgestone Financial Services, Inc.
                 (Name of small business issuer in its charter)

                   Wisconsin                                 39-1797151 
        (State or other jurisdiction of                   (I.R.S. Employer     
        incorporation or organization)                    Identification No.)

13925 West North Avenue, Brookfield, Wisconsin                 53005
   (Address of principal executive offices)                  (Zip Code)

Issuer's telephone number (414) 789-1011

Securities registered under Section 12(b) of the Act:  None

Securities registered under Section 12(g) of the Exchange Act:

                           Common Stock, no par value
                                (Title of class)

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

       Check if  disclosure  of  delinquent  filers in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10KSB. [ ]

Issuer's revenues for its most recent fiscal year: $5,223,115

Aggregate  market  value of voting stock held by  non-affiliates  of the issuer:
$8,608,320

Number of shares of common stock,  no par value,  outstanding  on March 1, 1999:
876,492

                      DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 1999 Annual Meeting (incorporated by reference into Part
III)

Transitional Small Business Disclosure Format: Yes ___; No X .


<PAGE>



                       Ridgestone Financial Services, Inc.

                                 Index to Annual
                              Report on Form 10-KSB
                   For The Fiscal Year Ended December 31, 1998

                                                                            Page

Part I  .......................................................................1
        Item 1.  Description of Business.......................................1
        Item 2.  Description of Property.......................................8
        Item 3.  Legal Proceedings.............................................8
        Item 4.  Submission of Matters to a Vote of Security Holders...........8

Part II .......................................................................8
        Item 5.  Market for Common Equity and Related Stockholder Matters......8
        Item 6.  Management's Discussion and Analysis .........................9
        Item 7.  Financial Statements.........................................26
        Item 8.  Changes In and Disagreements With Accountants on
                    Accounting and Financial Disclosure.......................52

Part III......................................................................52
        Item 9.  Directors, Executive Officers, Promoters and Control 
                    Persons; Compliance With Section 16(a) of the
                    Exchange Act..............................................52
        Item 10. Executive Compensation.......................................52
        Item 11. Security Ownership of Certain Beneficial Owners and
                    Management................................................52
        Item 12. Certain Relationships and Related Transactions...............52
        Item 13. Exhibits and Reports on Form 8-K.............................52

SIGNATURES ...................................................................53


                                       -i-

<PAGE>



Part I

Item 1.    Description of Business

General

Ridgestone  Financial  Services,   Inc.  (the  "Company")  was  incorporated  in
Wisconsin on May 25,  1994.  The Company was formed to acquire all of the issued
and  outstanding  stock of  Ridgestone  Bank (the  "Bank")  and to engage in the
business of a bank holding  company under the Bank Holding  Company Act of 1956,
as amended (the "BHCA").  The organizers  received a certificate of authority to
organize the Bank from the Wisconsin Commissioner of Banking on May 9, 1995. The
organizers'  application  for deposit  insurance was approved on May 24, 1995 by
the  Federal  Deposit  Insurance  Corporation   ("FDIC"),   subject  to  certain
conditions  including  conditions  related to capital  adequacy.  The  Company's
application  to become a bank  holding  company for the Bank was approved by the
Federal  Reserve  Board on July 20,  1995.  In November  1995,  the Company sold
834,340 shares of its common stock, no par value, in an initial public offering.
The net proceeds received by the Company in this offering totaled  approximately
$7.8  million.  The Bank was  capitalized  on  December 6, 1995,  and  commenced
operations on December 7, 1995.

The Bank provides  full-service  commercial and consumer banking services in its
primary market areas of Brookfield, Elm Grove and Wauwatosa, Wisconsin. The Bank
competes  with  other  commercial  banks,   savings  banks,   savings  and  loan
institutions,  credit unions and other financial  service  organizations  in the
three-city  area. The Bank is one of the newest  financial  institutions  in its
market.

The Bank was the first bank in Wisconsin to introduce  full-service  PC banking,
called RidgeStone Connect(sm). This on-line service enables the Bank's customers
to access their accounts in real time, pay bills,  transfer funds,  access lines
of credit, exchange e-mail and view product and rate information.  Approximately
22% of the Bank's consumer customers were enrolled in RidgeStone  Connect(sm) as
of December 31, 1998.

The  Company's  principal  business  is the  business  of the Bank.  The  Bank's
principal business consists of attracting deposits from the public and investing
those deposits in loans and  securities.  The Bank's deposits are insured to the
maximum extent  allowable by the FDIC.  The Company's  results of operations are
dependent primarily on net interest income,  which is the difference between the
interest  earned on its loans and  securities and the interest paid on deposits.
The  Company's  operating  results are affected by deposit  service  charges and
other income.  Operating  expenses of the Company include employee  compensation
and benefits, occupancy and equipment expense,  professional and data processing
fees, advertising and marketing expenses, and other administrative expenses. The
Company's  operating  results  are also  affected by  economic  and  competitive
conditions,  particularly  changes in interest  rates,  government  policies and
actions of regulatory authorities.

In 1996, the Bank received regulatory approval to open its first branch at 15565
W. North  Avenue,  Brookfield,  Wisconsin.  The branch  opened for  business  on
January 2, 1997 and houses a  drive-thru  branch  banking  facility  and banking
operations center.

Special Note Regarding Forward-Looking Statements

Certain   matters   discussed   in  this  Annual   Report  on  Form  10-KSB  are
"forward-looking  statements"  intended  to qualify  for the safe  harbors  from
liability  established by the Private Securities  Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the  statement  will  include  words such as the Company  "believes,"
"anticipates,"   "expects,"  or  other  words  of  similar  import.   Similarly,
statements  that  describe the Company's  future plans,  objectives or goals are
also forward-looking  statements. Such forward-looking statements are subject to
certain  risks and  uncertainties  which  could cause  actual  results to differ
materially from those  contemplated  in the forward-  looking  statements.  Such
risks include, among others:  interest rate trends, the general economic climate
in the Company's market area, loan delinquency  rates, risks associated with the
turning of the Year 2000, and legislative enactments or regulatory changes which
adversely  affect the  business  of the Company  and/or the Bank.  Shareholders,
potential  investors  and other  readers are urged to consider  these factors in
evaluating the forward-looking statements. The forward-looking

                                                                   

<PAGE>



statements included herein are only made as of the date of this Annual Report on
Form 10-KSB and the Company  undertakes no  obligation  to publicly  update such
forward-looking statements to reflect subsequent events or circumstances.

Business Strategy

The  Bank's  strategy  is to  concentrate  on the  financial  service  needs  of
individuals and small businesses by providing  on-site decision making and using
technology to enhance customer service.  As of December 31, 1998, the Bank had a
lending  limit of $850,000 per loan.  That limit was  increased to $1,000,000 in
the first quarter of 1999. The Bank is able to attract business loans beyond its
lending  limit by using  bank  participations  with  other  banks in  Wisconsin.
Likewise,  the Bank has  purchased  participations  from  other  area  Wisconsin
financial institutions.

Loan Products

The Bank  offers  a full  range  of  retail  and  commercial  lending  services,
including commercial revolving lines of credit,  residential and commercial real
estate  mortgage  loans,  consumer  loans and  equipment  financing.  These loan
products are discussed below.

Although  the Bank's  management  takes a  competitive  approach to lending,  it
stresses high quality in its loans. To promote such quality  lending,  the Board
of Directors of the Bank has established maximum lending authority for each loan
officer.  Each loan  request  exceeding  a loan  officer's  authority  has to be
approved by one or more senior officers. On a monthly basis, the entire Board of
Directors  of the Bank  reviews  all loans over  $25,000  made in the  preceding
month.  In  addition,  the Loan  Committee of the Board of Directors of the Bank
reviews loans over $250,000 for prior approval when the loan request exceeds the
established  limits of senior  loan  officers.  The Loan  Committee  of the Bank
reviews loans with aggregate  principal  amounts  between the lending  officer's
lending authority and $250,000. The Loan Committee is comprised of the President
of the Bank, the Executive Vice President and Senior Commercial Lender.  Because
of the  Bank's  local  nature,  management  believes  that  quality  control  is
achievable while still providing prompt and personal service.

Management of the Bank has established  relationships  with a correspondent bank
and other independent financial  institutions to provide other services required
by its customers, including loan participations where the requested loan amounts
exceed the Bank's policies or legal lending limits.

Real  Estate  Loans.  The Bank  originates  residential  mortgage  loans,  which
generally are long-term with either fixed or variable interest rates. The Bank's
policy is to retain all variable interest rate mortgage loans in the Bank's loan
portfolio  and to sell all fixed rate loans with their  servicing  rights in the
secondary market.  This policy is subject to review by management as a result of
changing market and economic conditions.

The  retention  of  variable-rate  loans in the Bank's loan  portfolio  helps to
reduce the Bank's  exposure to fluctuations  in interest  rates.  However,  such
loans  generally  pose credit risks  different  from the risks inherent in fixed
rate loans,  primarily because as interest rates rise, the interest payments due
from the borrowers rise, thereby increasing the potential for default.

Regulatory and  supervisory  loan-to-value  ("LTV")  limits were  established by
Section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").  The Bank's internal  limitations follow those limits and in certain
cases are more  restrictive  than those  mandated  by the  regulators.  Proof of
insurance is required on all collateral  taken as security  before loan proceeds
are advanced.




                                       -2-

<PAGE>



The regulatory limits are as follows:


          Loan Category                                                LTV Limit
          -------------                                                ---------
          Raw Land                                                       65%
          Land Development                                               75%
          Construction:
              Commercial, multi-family, and non-residential              80%
              1-4 family residential                                     85%
          Improved Property                                              85%
          Owner-occupied 1-4 family and home equity                      90% (1)

       (1)    Residential  loans  exceeding  the 90% limit may be excluded  from
              reporting requirements of FDICIA if enhanced by mortgage insurance
              or readily marketable collateral.

Personal Loans. The Bank makes personal loans,  lines of credit and credit cards
available  to  consumers  for  various   purposes,   such  as  the  purchase  of
automobiles, boats and other recreational vehicles, home improvements, education
and personal investments. The Bank retains substantially all such loans.

Commercial  Loans.  Commercial  loans are made  primarily to small and mid-sized
businesses.  These  loans may be secured or  unsecured,  and are  available  for
general  operating  purposes,  acquisition  of fixed  assets  and  real  estate,
purchases of equipment  and  machinery,  and  financing  inventory  and accounts
receivable.  The Bank generally looks to a borrower's business operations as the
principal source of repayment, but also receives, when appropriate, mortgages on
real estate,  security  interests in inventory,  accounts  receivable  and other
personal property and/or personal guaranties to secure repayment.

The Bank's  commercial  loan  portfolio  totaled  $10,011,324 as of December 31,
1998, and consisted primarily of lines of credit and loans to businesses.  Lines
of credit are generally  used for the purpose of financing  working  capital and
may be secured  with  current  assets of the  borrower.  Loans are written for a
period of greater than one year,  are  amortized  over a period of five to seven
years and are used principally for financing fixed asset expenditures. Loans are
generally secured with the fixed assets of the borrower.

Real Estate  Commercial Loans. As of December 31, 1998, the Bank had $21,033,369
of real estate commercial loans outstanding. These loans were generally made for
the purpose of purchasing manufacturing facilities, warehouses, office buildings
and multiple family commercial real estate holdings.

Competition.  The Company has identified as its primary competitors,  offices of
either thrifts,  credit unions or banks  operating in Brookfield,  Elm Grove and
Wauwatosa,  Wisconsin.  Although the Bank  commenced  operations  on December 7,
1995,  its  deposits  as of  June  1998  exceeded  those  of  many  of its  area
competitors which have been operating for longer periods of time.

The Bank also faces  competition from finance  companies,  insurance  companies,
mortgage  companies,  securities  brokerage firms,  money market funds and other
providers of financial  services.  Most of the Bank's  competitors  have been in
business for a number of years, have established  customer bases, are larger and
have higher lending limits than the Bank.


                                       -3-

<PAGE>



The Bank  competes  for loans  principally  through its  ability to  communicate
effectively and  professionally  with its customers in understanding and meeting
their needs.  Management believes that its personal service philosophy continues
to enhance  its  ability to  compete  favorably  in  attracting  individual  and
business customers. The Bank actively solicits retail customers and competes for
deposits by offering  customers  personal  attention,  professional  service and
competitive interest rates.

Supervision and Regulation

The  operations  of  financial  institutions,  including  banks and bank holding
companies, are highly regulated,  both at the federal and state levels. Numerous
statutes and regulations affect the business of the Company and the Bank. To the
extent that the  information  below is a summary of statutory  provisions,  such
information  is  qualified  in  its  entirety  by  reference  to  the  statutory
provisions described.  There are additional laws and regulations having a direct
or indirect effect on the business of the Company or the Bank.

In recent  years,  the banking and  financial  industry  has been the subject of
numerous legislative acts and proposals, administrative rules and regulations at
both federal and state regulatory levels. As a result of many of such regulatory
changes,  the nature of the banking industry in general has changed dramatically
in recent years as increasing  competition and a trend toward  deregulation have
caused  the  traditional   distinctions   among  different  types  of  financial
institutions  to be  obscured.  Further  changes  along these lines could permit
other  financially  oriented  businesses  to offer  expanded  services,  thereby
creating  greater  competition  for the  Company  and the Bank with  respect  to
services  currently  offered  or which  may in the  future be  offered  by those
entities.  Proposals for new legislation or rule making  affecting the financial
services  industry are  continuously  being  advanced and considered at both the
national  and state  levels.  Neither  the  Company nor the Bank can predict the
effect that future legislation or regulation will have on the financial services
industry in general or on their businesses in particular.

The  performance  and earnings of the Bank,  like other  commercial  banks,  are
affected  not only by general  economic  conditions  but also by the policies of
various governmental regulatory authorities.  In particular, the Federal Reserve
System  regulates  money and credit  conditions  and interest  rates in order to
influence general economic conditions  primarily through open-market  operations
in U.S. Government securities, varying the discount rate on bank borrowings, and
setting reserve requirements against bank deposits.  The policies of the Federal
Reserve System have a significant  influence on overall growth and  distribution
of bank loans,  investments  and deposits,  and affect  interest rates earned on
loans and  investments.  The general  effect,  if any, of such policies upon the
future business and earnings of the Bank cannot accurately be predicted.

The Company.  As a registered  bank holding  company,  the Company is subject to
regulation  under the BHCA.  The BHCA  requires  every bank  holding  company to
obtain the prior  approval  of the Board of  Governors  of the  Federal  Reserve
System (the "Board")  before it may merge with or consolidate  into another bank
holding company,  acquire  substantially  all the assets of any bank, or acquire
ownership or control of any voting shares of any bank if after such  acquisition
it would own or  control,  directly  or  indirectly,  more than 5% of the voting
shares of such bank.

Under the BHCA,  the  Company  is  prohibited,  with  certain  exceptions,  from
acquiring direct or indirect  ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding  company,  and neither
the Company nor any  subsidiary  may engage in any business  other than banking,
managing or controlling banks or furnishing  services to or performing  services
for its subsidiaries. After notice to or approval of the Board, the Company may,
however, own more than 5% of the shares of a company the activities of which the
Board has  determined  to be so  closely  related  to  banking  or  managing  or
controlling  banks  as to be a proper  incident  thereto,  and the bank  holding
company  itself  may  engage in such  activities.  The  Company  has no  pending
acquisition plans.

As a registered  bank holding  company,  the Company is supervised and regularly
examined by the Board.  Under the BHCA, the Company is required to file with the
Board an annual report and such additional  information as may be required.  The
Board can order  bank  holding  companies  and their  subsidiaries  to cease and
desist from any actions which

                                       -4-

<PAGE>



in the opinion of the Board  constitute  serious risk to the  financial  safety,
soundness  or stability of a  subsidiary  bank and are  inconsistent  with sound
banking  principles  or in violation  of law. The Board has adopted  regulations
which deal with the measure of capitalization for bank holding  companies.  Such
regulations  are  essentially  the same as those adopted by the FDIC,  described
below. The Board's  regulations also provide that its capital  requirements will
generally be applied on a bank-only  (rather than a  consolidated)  basis in the
case of a bank holding company with less than $150 million in total consolidated
assets.  The Board has also  issued a policy  statement  on the  payment of cash
dividends  by bank holding  companies,  wherein the Board has stated that a bank
holding company  experiencing  earnings weaknesses should not pay cash dividends
exceeding  its net income or which  could only be funded in ways that weaken the
bank holding company's financial health, such as by borrowing.

Under  Wisconsin law, the Company is also subject to supervision and examination
by the Wisconsin  Department of Financial  Institutions (the "Department").  The
Department is also empowered to issue orders to a bank holding company to remedy
any condition or policy  which,  in its  determination,  endangers the safety of
deposits  in any  subsidiary  state  bank,  or the  safety  of the  bank  or its
depositors. In the event of noncompliance with such an order, the Department has
the power to direct the  operation  of the state bank  subsidiary  and  withhold
dividends from the holding company.

The Company, as the holder of the stock of a Wisconsin state-chartered bank, may
be subject to assessment to restore  impaired  capital of the bank to the extent
provided in Section 220.07,  Wisconsin Statutes. Any such assessment would apply
only to the Company and not to any  shareholder of the Company.  The Company has
committed to the Department that if the Bank's contingent fund decreases to less
than  $250,000,  the Company will transfer funds to the Bank's  contingent  fund
sufficient to restore the contingent fund to at least $500,000.

Federal law prohibits the  acquisition of "control" of a bank holding company by
individuals  or business  entities or groups or  combinations  of individuals or
entities acting in concert without prior notice to the appropriate  federal bank
regulator.  For this purpose,  "control" is defined in certain  instances as the
ownership of or power to vote 10% or more of the outstanding  shares of the bank
holding company.

The Bank. As a  state-chartered  institution,  the Bank is subject to regulation
and supervision by the Department and the Wisconsin  Banking Review Board and is
periodically  examined  by the  Department's  staff.  Deposits  of the  Bank are
insured by the Bank Insurance Fund  administered by the FDIC and as a result the
Bank is also subject to regulation by the FDIC and periodically  examined by its
staff.

The  Federal  Deposit  Insurance  Act  requires  that  the  appropriate  federal
regulatory  authority  -- the FDIC in the case of the Bank (as an insured  state
bank  which is not a member  of the  Federal  Reserve  System)  --  approve  any
acquisition  by  it  through  merger,  consolidation,  purchase  of  assets,  or
assumption of deposits. The same regulatory authority also supervises compliance
by the Bank with provisions of federal  banking laws which,  among other things,
prohibit the granting of preferential  loans to executive  officers,  directors,
and principal shareholders of banks which have a correspondent relationship with
one another.

Wisconsin  banking laws restrict the payment of cash dividends by state banks by
providing that (i) dividends may be paid only out of a bank's undivided profits,
and (ii) prior  consent  of the  Department  is  required  for the  payment of a
dividend which exceeds  current year income if dividends  declared have exceeded
net profits in either of the two immediately  preceding  years. The various bank
regulatory  agencies  have  authority to prohibit a bank  regulated by them from
engaging in an unsafe or unsound  practice;  the payment of a dividend by a bank
could, depending upon the circumstances, be considered such an unsafe or unsound
practice.  In the  event  that (i) the FDIC or the  Department  should  increase
minimum  required levels of capital;  (ii) the total assets of the Bank increase
significantly; (iii) the income of the Bank decreases significantly; or (iv) any
combination of the foregoing occurs, then the Board of Directors of the Bank may
decide or be required by the FDIC or the Department to retain a greater  portion
of the Bank's earnings to achieve or maintain the required capital.


                                       -5-

<PAGE>



Subsidiary  banks of a bank holding company are subject to certain  restrictions
imposed  by the  Federal  Reserve  Act on any  extensions  of credit to the bank
holding  company or any of its  subsidiaries,  on  investments in stock or other
securities  of the bank  holding  company  and on the  taking  of such  stock or
securities  as  collateral  for  loans  to any  borrower.  Under  the  BHCA  and
regulations  of the Board,  a bank  holding  company  and its  subsidiaries  are
prohibited  from engaging in certain tie-in  arrangements in connection with any
extension of credit or of any property or service.

The  activities  and  operations  of banks are subject to a number of additional
detailed,   complex  and  sometimes  overlapping  federal  and  state  laws  and
regulations.  These  include  state usury and consumer  credit laws,  state laws
relating to fiduciaries,  the Federal Truth-in-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Financial  Institutions  Reform,  Recovery and Enforcement Act of 1989,
FDICIA,  the Community  Reinvestment  Act,  anti-redlining  legislation  and the
antitrust laws. The Community  Reinvestment Act includes  provisions under which
the  federal  bank  regulatory  agencies  must  consider,   in  connection  with
applications for certain required approvals,  including  applications to acquire
control of a bank or bank holding company or to establish a branch,  the records
of  regulated   financial   institutions  in  satisfying  their  continuing  and
affirmative   obligations   to  help  meet  the  credit  needs  of  their  local
communities, including those of low and moderate-income borrowers.

FDICIA, among other things, establishes five tiers of capital requirements: well
capitalized,    adequately    capitalized,    undercapitalized,    significantly
undercapitalized,   and  critically  undercapitalized.   The  FDIC  has  adopted
regulations  which  define the  relevant  capital  measures for the five capital
categories.  An institution is deemed to be "well capitalized" if it has a total
risk-based  capital  ratio  (total  capital to  risk-weighted  assets) of 10% or
greater,  a Tier I  risk-based  capital  ratio (Tier I Capital to risk  weighted
assets) of 6% or greater, and a Tier I leverage capital ratio (Tier I Capital to
average  assets) of 5% or  greater,  and is not subject to a  regulatory  order,
agreement,  or directive to meet and maintain a specific  capital  level for any
capital measure.  An institution is deemed to be "adequately  capitalized" if it
has a total  risk-based  capital  ratio of 8% or  greater,  a Tier I  risk-based
capital of 4% or greater,  and (generally) a Tier I leverage capital ratio of 4%
or  greater,  and  the  institution  does  not  meet  the  definition  of a well
capitalized institution. An institution is deemed to be "undercapitalized" if it
has a total  risk-based  capital  ratio  less  than 8%,  or a Tier I  risk-based
capital ratio less than 4%, or  (generally) a Tier I leverage ratio of less than
4%. An institution is deemed to be "significantly  undercapitalized" if it has a
total  risk-based  capital  ratio less than 6%, or a Tier I  risk-based  capital
ratio less than 3%, or a Tier I leverage  ratio less than 3%. An  institution is
deemed to be "critically  undercapitalized" if it has a ratio of tangible equity
(as defined in the  regulations)  to total  assets that is equal to or less than
2%. Undercapitalized banks may be subject to growth limitations and are required
to submit a capital  restoration  plan.  If an  undercapitalized  bank  fails to
submit  an  acceptable   plan,  it  is  treated  as  if  it  is   "significantly
undercapitalized."  Significantly  undercapitalized  banks may be  subject  to a
number of requirements  and  restrictions,  including  orders to sell sufficient
voting  stock to become  adequately  capitalized,  requirements  to reduce total
assets,  and  cessation  of  receipt  of  deposits  from  correspondent   banks.
"Critically  undercapitalized"  institutions  may not,  beginning  60 days after
becoming critically undercapitalized,  make any payment of principal or interest
on  their   subordinated   debt.  The  Bank  currently  exceeds  the  regulatory
definitions of a well capitalized financial institution.

As a condition to the regulatory approvals incident to the Bank's formation, the
Bank was  required to maintain a minimum  leverage  ratio of 8% until  December,
1998.

The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994 (the
"Riegle  Act"),  among other things,  permits bank holding  companies to acquire
banks in any state effective September 29, 1995. The Riegle Act contains certain
exceptions relative to acquisitions. For example, a bank holding company may not
acquire a bank  that has not been in  existence  for less than a minimum  period
established  by the home state;  however,  the minimum period cannot exceed five
years.  The  Riegle  Act makes a  distinction  between  interstate  banking  and
interstate  branching.  Under the  Riegle  Act,  banks can merge  with  banks in
another  state  beginning  June 1,  1997,  unless  a  state  has  adopted  a law
preventing interstate branching.  Under terms of the BHCA, an acquiring bank may
not  control  more than 10 percent  of  federal  or 30  percent  of state  total
deposits of insured depository institutions.  Wisconsin law requires approval by
the Department for all acquisitions of Wisconsin  banks,  whether by an in-state
or out-of-state purchaser and requires, in an interstate  acquisition,  that the
acquired bank must have been in existence for at least five years.

                                       -6-

<PAGE>



Employees

As of December 31, 1998, the Company and the Bank together employed 14 full-time
and 6 part-time  employees,  including  three  personal  bankers,  an investment
officer, five operations specialists,  six customer service  representatives,  a
cashier,  one  commercial  loan  officer,  a senior  officer in charge of retail
banking, a technology specialist and the Bank president.

Directors and Executive Officers

The directors of the Company and the Bank as of March 1, 1999 were as follows:

Name of Director                         Principal Occupation

Paul E. Menzel                President  and  Chief  Executive  Officer  of  the
                              Company and the Bank

William R. Hayes              Vice  President  and  Treasurer of the Company and
                              Vice President, Cashier/Controller of the Bank

Christine V. Lake             Vice  President  and  Secretary of the Company and
                              Executive Vice President and Secretary of the Bank

Charles N. Ackley             Owner  of  C.N.A.  Associates,   Inc.,  a  company
                              engaged   in   the   sales    representation    of
                              manufacturers

Bernard E. Adee               Senior  Vice   President  of  Marshall   Financial
                              Consulting, LLC

Gregory J. Hoesly             President of L.L. Richards  Machinery Co., Inc., a
                              machine tool dealer

John E. Horning               Chairman of the Board and Chief Executive  Officer
                              of Shorewest  Realtors  Inc.,  Wisconsin  Mortgage
                              Corporation, and Heritage Title Service

William F. Krause, Jr.        Retired President of Krause Funeral Home, Inc.

Charles G. Niebler            President of Eye Care Vision Centers

James E. Renner               Owner of Renner Oldsmobile and Renner Mitsubishi

Richard A. Streff             Chairman of the Board of Streff Advertising, Inc.

William J. Tetzlaff           President   of  Tetzlaff   Associates,   Inc.,   a
                              consulting services company; President of Advanced
                              Plastics Technology, Inc., a distribution company;
                              Vice President of Executive Travel Services, Ltd.,
                              a travel  agency;  Vice  President  of Around  the
                              Globe Travel, a travel agency

The  executive  officers of the Company and the Bank as of March 1, 1999 were as
follows:

Name of Executive Officer                     Position

Paul E. Menzel                President  and  Chief  Executive  Officer  of  the
                              Company and the Bank

William R. Hayes              Vice  President  and  Treasurer of the Company and
                              Vice President, Cashier/Controller of the Bank

Christine V. Lake             Vice  President  and  Secretary of the Company and
                              Executive Vice President and Secretary of the Bank


                                       -7-

<PAGE>



Item 2.    Description of Property

The Company has leased space at 13925 West North Avenue,  Brookfield,  Wisconsin
for use as the Bank's main office and the Company's headquarters.  The lease has
a five-year  term with  renewal  and  purchase  options.  The Bank's main office
occupies  approximately 5,000 square feet of a larger shopping mall which houses
various retail establishments.

The Bank opened its drive-up branch on January 2, 1997. The branch is located in
a turn-of-the-century  schoolhouse building, which has been renovated to house a
branch banking  facility.  The Company owns this  facility,  which is located on
approximately one acre of land at 15565 W. North Avenue,  Brookfield,  Wisconsin
and has  approximately  1,057 square feet of space.  It provides  four  drive-up
kiosks and room for one drive-up automated teller machine.

Item 3.    Legal Proceedings

Neither the Company nor the Bank is party to any material legal proceedings.

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

There were no matters  submitted to the  shareholders  of the Company for a vote
during the fourth quarter of the year ended December 31, 1998.


Part II

Item 5.    Market for Common Equity and Related Stockholder Matters

The Company's common stock has traded in the  over-the-counter  market since the
completion of the company's  initial public  offering in November 1995. High and
low bid  prices,  as  reported  on the OTC  Bulletin  Board,  and as adjusted to
reflect a 5% stock dividend paid on the Company's  common stock on May 21, 1998,
for each quarter within the last two fiscal years were as follows:

           1997                    High               Low
           ----                    ----               ---
       1st Quarter                $13.33            $12.62
       2nd Quarter                $15.00            $13.21
       3rd Quarter                $15.48            $13.81
       4th Quarter                $16.90            $15.24


            1998                   High               Low
            ----                   ----               ---
       1st Quarter                $18.25            $16.429
       2nd Quarter                $18.25            $16.70
       3rd Quarter                $18.75            $16.00
       4th Quarter                $16.00            $12.00

These quotations reflect inter-dealer prices, without retail mark-up,  mark-down
or commission,  and may not represent actual  transactions.  These quotations do
not  include  intra-day  highs  and lows.  On  December  31,  1998,  there  were
approximately 39 owners of record and approximately 548 beneficial owners of the
Company's common stock.


                                       -8-

<PAGE>



No cash dividends have been declared to date on the Company's  common stock. The
Company  expects  that all  earnings,  if any,  will be  retained to finance the
growth of the Company and the Bank and that no cash  dividends  will be paid for
the  foreseeable  future.  If and when cash dividends are declared,  the Company
will be  dependent  upon  dividends  paid to it by the  Bank  for  funds  to pay
dividends on its common stock.  The Board of Directors of the Company declared a
5% stock dividend on all shares of the Company's common stock outstanding on May
11, 1998.

Wisconsin  banking laws restrict the payment of cash dividends by state banks by
providing that (i) dividends may be paid only out of a bank's undivided profits,
and (ii) prior  consent  of the  Department  is  required  for the  payment of a
dividend  which  exceeds the current  year's  income if dividends  declared have
exceeded  net  profits  in  either  of  the  two  immediately  preceding  years.
Additionally,  the various bank regulatory agencies have authority to prohibit a
bank  regulated  by them from  engaging  in an unsafe or unsound  practice.  The
payment of a dividend  by a bank could,  depending  upon the  circumstances,  be
considered such an unsafe or unsound practice. In the event that (i) the FDIC or
the Department  should increase  minimum  required  levels of capital;  (ii) the
total assets of the Bank  increase  significantly;  (iii) the income of the Bank
decreases  significantly;  or (iv) any combination of the foregoing occurs, then
the Board of  Directors of the Bank may decide or be required by the FDIC or the
Department  to retain a greater  portion  of the Bank's  earnings  to achieve or
maintain  the  required  capital.  In  addition  to  the  foregoing,   Wisconsin
corporations  such as the  Company  are  prohibited  by the  Wisconsin  Business
Corporation Law from paying dividends while they are insolvent or if the payment
of dividends would render them unable to pay debts as they come due in the usual
course of business.


Item 6.    Management's Discussion and Analysis

Comparison  of  Operating  Results  for the Years  Ended  December  31, 1998 and
December 31, 1997.

Net Income.  For the fiscal year ended December 31, 1998, the Company reported a
profit of  $331,377 or $0.37 per diluted  common  share  compared to a profit of
$41,633 or $0.05 per diluted  common share for fiscal 1997.  This is an increase
in 1998 earnings of $289,744, or 696% over fiscal 1997. A tax benefit related to
a tax loss  carryforward  accounted  for $200,000 of net income for fiscal 1998.
Additionally,  the increased  earnings is attributable to increased loan growth,
improved margins and greater fee income generation in loans.

Interest  Income.  Interest  income  consists  primarily  of  interest  on loans
(including  loan fees),  federal  funds sold,  securities  and  interest-bearing
deposits at other  financial  institutions.  Total interest  income for the year
ended  December 31, 1998  increased to $4,940,943  from  $3,706,879 for the year
ended  December 31, 1997,  an increase of  $1,234,064  or 33%. This increase was
primarily the result of greater average outstanding  balances in earning assets,
which grew by  $14,311,075  or 31%, in fiscal  1998.  The  increase in the asset
yield  is a  result  of a  change  in the mix of  earning  assets  as a  greater
percentage of earning assets shifted into loans which carry a higher yield.

Interest  Expense.  Interest  expense  primarily  represents  interest  paid  to
depositors.  Interest  expense  increased  to  $2,881,181  in  fiscal  1998 from
$2,126,065  in fiscal  1997,  an increase of  $755,116 or 36%.  The  increase in
interest   expense  was  due  to  greater   average   outstanding   balances  in
interest-bearing  liabilities,  primarily time deposits and money market deposit
accounts,  while the yield on interest bearing  liabilities  remained relatively
unchanged.










                                       -9-

<PAGE>

Set forth below is a summary of the Company's average deposits and interest paid
on such deposits during fiscal 1998 and fiscal 1997.
<TABLE>
<CAPTION>
                                        
                                   1998               Rate Paid            1997               Rate Paid
                               --------------     ---------------     ---------------     ---------------
<S>                               <C>                  <C>                <C>                   <C>     
Non interest-bearing demand       $ 6,489,824             --              $ 4,363,342             ---
Interest-bearing demand             1,454,223          1.72%                  827,094           1.76%
Money market demand                24,363,265          5.29%               18,266,062           5.27%
Savings deposits                    1,258,761          2.77%                  827,824           2.93%
Time deposits                      25,075,721          6.11%               18,506,746           6.07%
Purchased funds                             0          0.00%                    9,603           6.12%
                                  -----------          -----              -----------           -----
     Total deposits               $58,641,794          4.91%              $42,800,671           4.97%
                                  ===========          =====              ===========           =====
</TABLE>

                                                                   
Net Interest  Income.  Net interest  income  represents the  difference  between
interest income earned on  interest-earning  assets and interest expense paid on
interest-bearing  liabilities.  Net interest income rose from $1,580,814 for the
year ended December 31, 1997 to $2,059,762 for the year ended December 31, 1998,
an increase  of $478,948 or 30%.  This  increase  was  predominantly  due to the
volume  increases in earning assets,  predominantly in loans which are at higher
rates than other  earning  assets,  while the average  cost on interest  bearing
liabilities remained relatively unchanged.

The  following  table sets forth an analysis of the interest  rates and interest
differential of the Company's  earning assets,  which earn interest income,  and
interest bearing liabilities, which accrue interest expense, for fiscal 1998 and
fiscal 1997.
<TABLE>
<CAPTION>
                                                                        Average Balance Sheet and
                                                                     Analysis of Net Interest Income
                                                                        Year Ended December 31,

                                                              1998                                             1997

                                           Average          Related         Yield            Average          Related        Yield
                                           Balance          Interest        Rate             Balance          Interest       Rate
                                       ----------------  --------------  -----------     ----------------  --------------  ---------
Earning assets:                                                                                              
<S>                                   <C>                 <C>               <C>          <C>                <C>               <C>  
    Time deposits in bank             $       105,954     $     7,553       7.13%        $      177,939    $     15,740       8.85%
    Investments (taxable)                   3,690,491         237,396       6.43%             9,439,985         546,627       5.79%
    Funds sold                              7,721,729         411,276       5.33%             3,556,986         195,211       5.49%
    Loans (a)                              48,971,885       4,284,718       8.75%            33,004,074       2,949,301       8.94%
                                           ----------       ---------       ----             ----------       ---------       ----
                                                                                                             
        Total earning assets          $    60,490,059     $ 4,940,943       8.17%            46,178,984    $  3,706,879       8.03%
                                           ==========       ---------       ====         $   ==========       ---------       ====
                                                                                                             
Interest-bearing liabilities:                                                                                
    NOW accounts                      $     1,454,223     $    25,039       1.72%               827,094    $     14,547       1.76%
    Savings accounts                        1,258,761          34,839       2.77%        $      827,824          24,285       2.93%
    Money market accounts                  24,363,265       1,289,271       5.29%            18,266,062         963,322       5.27%
    Time deposits                          25,075,721       1,532,032       6.11%            18,506,746       1,123,323       6.07%
    Purchased funds                                 0               0       0.00%                 9,603             588       6.12%
                                           ----------       ---------       ----             ----------       ---------       ----
      Total interest-bearing liabs    $    52,151,970     $ 2,881,181       5.52%            38,437,329    $  2,126,065       5.53%
                                           ==========       ---------       ====         $   ==========       ---------       ====
                                                                                                             
Interest spread (b)                                       $ 2,059,762       2.65%                          $  1,580,814       2.50%
                                                            =========       ====                              =========       ====
                                                                                                             
Interest margin (c)                                       $ 2,059,762       3.41%                          $  1,580,814       3.42%
                                                            =========       ====                              =========       ====
                                                                                                             
                                                                                                           
----------                                                                                 
(a) Non-accruing loans are included in the computation of average balances. Loan         
interest income includes net loan fees.

(b) The interest  spread is the  difference  between the yield on earning assets
and the yield on interest-bearing liabilities.

(c) The interest  margin is the net  interest  income  divided by total  earning
assets.

</TABLE>

                                      -10-
<PAGE>



The following  table describes the extent to which changes in interest rates and
changes  in  the  volume  of   interest-earning   assets  and   interest-bearing
liabilities have affected the Company's interest income and interest expense for
the period  indicated.  Information is provided in each category with respect to
(i) changes  attributable to changes in volume (changes in volume  multiplied by
prior  rate),  (ii)  changes  attributable  to changes in rate  (changes in rate
multiplied  by  prior  volume),   (iii)  changes   attributable  to  changes  in
rate/volume  (changes in rate multiplied by changes in volume), and (iv) the net
change. The changes  attributable to the combined impact of volume and rate have
been allocated  proportionately to the changes due to volume and the changes due
to rate.

<TABLE>
<CAPTION>

                                                                     Rate/Volume Analysis of Net Interest Income
                                                                            Year Ended December 31, 1998
                                                                                     Compared to
                                                                            Year Ended December 31, 1997
                                                 --------------------------------------------------------------------------------
                                                                             Increase (Decrease) Due To
                                                 --------------------------------------------------------------------------------
                                                      Volume                Rate             Rate/Volume               Net
                                                 ----------------      ---------------     ----------------     -----------------
Earning assets:                    
<S>                                              <C>                   <C>                 <C>                  <C>              
  Time deposits in bank                          $        (6,367)      $       (3,056)     $        1,236       $         (8,187)
  Investments (taxable)                                 (332,927)              60,613             (36,917)              (309,231)
  Funds sold                                              228,565              (5,758)             (6,742)               216,065
  Loans                                                 1,426,911             (61,661)            (29,833)             1,335,417
                                                 ----------------      ---------------     ----------------     -----------------
        Total earning assets                     $      1,316,182      $       (9,862)     $      (72,256)      $      1,234,064
                                                 ================      ===============     ================     =================
                                    
Interest-bearing liabilities:  
  NOW accounts                                   $         11,030      $         (306)     $          (232)     $          10,492
  Savings accounts                                         12,642              (1,373)                (715)                10,554
  Money market accounts                                   321,557               3,293                1,099                325,949
  Time deposits                                           398,723               7,370                2,616                408,709
  Purchased funds                                               0                   0                 (588)                  (588)
                                                 ----------------      ---------------     ----------------     -----------------
        Total interest-bearing liabilities       $        743,952      $        8,984      $         2,180      $         755,116
                                                 ----------------      ---------------     ----------------     -----------------
        Net change in net interest income        $        572,230      $      (18,846)     $       (74,436)     $         478,948
                                                 ================      ===============     ================     =================
                                           
</TABLE>

Provision  for  Loan  Losses.   The  provision  for  loan  losses  is  based  on
management's  evaluation of factors such as the local and national economies and
the  risks  associated  with the  loans in the  portfolio.  In  accordance  with
Financial  Accounting  Standards  Board  ("FASB")  Statements No. 5 and 114, the
allowance is provided for losses that have  potentially  been incurred  based on
the Bank's  outstanding  loan  balance as of the balance  sheet  date.  The Bank
evaluates the adequacy of the loan loss reserve based on past events and current
economic  conditions,  and does not include the effects of  potential  losses on
specific  loans or groups of loans that are related to future  events or changes
in economic conditions which are then unknown to the Bank.

For each year ending  December  31, the  determination  of additions to the loan
loss reserve  charged to operating  expenses was based on an  evaluation  of the
loan portfolio, current domestic economic conditions, and other factors.

As of December 31, 1998,  the Company's  loan loss reserve was $562,747 or 1.15%
of  outstanding  loans  compared to $624,740  or 1.37% of  outstanding  loans at
December 31, 1997.

The Company's provision for loan losses was $65,000 in 1998 compared to $290,000
during 1997.  During fiscal 1998,  the Bank charged $4,504 against the loan loss
reserve related to consumer credit card losses. The Bank also reduced Other Real
Estate Owned by $122,489  and charged this amount  against the loan loss reserve
in order to reduce the value of Other Real Estate Owned to the  appraised  value
as received on December 30, 1997. During 1998, the Bank further reduced

                                      -11-

<PAGE>



Other  Real  Estate  Owned by  $476,654  as a result of the sale of real  estate
assets  owned by the  Bank.  Set forth  below is an  analysis  of the  Company's
provision for loan losses.
<TABLE>
<CAPTION>

                         Summary of Loan Loss Experience
                            And Loan Loss Provisions


                                                          1998                      1997
                                                  ---------------------      -------------------
<S>                                               <C>                        <C>
Beginning loan loss reserve                       $             624,740     $            334,740
Charge-offs:

     Commercial                                                       0                        0
     Real Estate:                                                             
        Construction                                                  0                        0
        Commercial                                              122,489                        0
        Other Mortgages                                               0                        0
     Installment-consumer                                         4,504                        0
Recoveries:
     Commercial                                                       0                        0
     Real Estate:
        Construction                                                  0                        0
        Commercial                                                    0                        0
        Other Mortgages                                               0                        0
     Installment-consumer                                             0                        0
                                                                -------                 --------
Net charge-offs                                   $             126,993      $                0
Additions charged to operations                                  65,000                  290,000
                                                                -------                 --------
Balance at end of period                          $             562,747      $          624,740
                                                                =======                 ========

Ratio of net charge-offs during the period to
average loans outstanding during the period                       0.26%                     0.0%

</TABLE>

Noninterest Income.  Total noninterest income (excluding gains and losses on the
sale of securities) was $289,859 for fiscal 1998 compared to $158,495 for fiscal
1997,  an increase of $131,364 or 83%.  Total  noninterest  income  consisted of
service charges on deposit accounts,  merchant credit card processing  services,
commission  income  generated by the investment  center and gains on the sale of
securities.  Fee income  generation from real estate loans sold in the secondary
market accounted for the majority of this increase.

Noninterest Expenses. Total noninterest expenses consisted primarily of salaries
and benefits,  occupancy and equipment expenses, data processing fees, marketing
expenses,  professional fees and other expenses. Noninterest expenses for fiscal
1998 were  $2,137,760  compared to  $1,944,782  for fiscal 1997,  an increase of
$192,978 or 10%. The primary  increase came in the area of salaries and benefits
which increased by $108,392 or 11%.  Occupancy and equipment  expenses increased
by $34,716 or 10% and all other noninterest  expenses increased by $49,870 or 9%
primarily due to an increase in professional and data processing fees.

In fiscal 1998,  the Bank's FDIC premiums were assessed at $6,643 as required by
federal law.

Selected  Financial Ratios. Set forth below are selected financial ratios of the
Company for fiscal 1998 and fiscal 1997:

                                                     1998            1997
                                                     ----            ----
      Return on average assets                       0.51%            0.08%
      Return on average equity                       5.60%            0.70%
      Dividend payout ratio on common stock        208.30%           None
      Average equity to average assets               9.02%           11.98%


                                      -12-

<PAGE>



Provision for Income Taxes.  A tax benefit of $200,000 was  recognized in fiscal
1998 resulting from a net operating loss carryforward, which will be utilized to
reduce taxable income in future periods.

Comparison  of  Operating  Results  for the Years  Ended  December  31, 1997 and
December 31, 1996.

Net Income. During the fiscal year ended December 31, 1997, the Company reported
a  profit  of  $41,633  or $.05  per  diluted  share  compared  to a net loss of
$1,271,070  or $1.52 per diluted  share for fiscal 1996.  Although a loss in the
second  year of  operation  was  anticipated  for a new banking  venture,  it is
noteworthy to indicate that the modest profit in 1997 resulted even after a loan
loss provision of $290,000.

Interest  Income.  Total  interest  income for the year ended  December 31, 1997
increased to $3,706,879 from $1,564,422 for the year ended December 31, 1996, an
increase  of  $2,142,457.  This  increase  was  primarily  the result of greater
average  outstanding  balances  in  earning  assets  and  improved  yields.  The
Company's  earning  assets grew by  $21,850,503  or 90% in fiscal 1997 while the
yield on total earning assets improved by 1.60%,  from 6.43% to 8.03%.  Interest
income consisted  primarily of interest on loans (including loan fees),  federal
funds  sold,  securities  and  interest-bearing   deposits  at  other  financial
institutions.

Interest  Expense.  Interest expense increased to $2,126,065 in fiscal 1997 from
$1,025,524 in fiscal 1996, an increase of $1,100,541. Interest expense primarily
represents  interest  paid to  depositors.  The  increase  in expense was due to
greater average outstanding balances in interest bearing liabilities,  primarily
deposits. The yield on interest bearing liabilities decreased by .17% from 5.14%
in 1996 to 4.97% in 1997.

Set forth below is a summary of the Company's average deposits and interest paid
on such deposits during fiscal 1997 and fiscal 1996.

<TABLE>
<CAPTION>

                                        1997                  Rate Paid               1996               Rate Paid
                                  --------------------     ---------------     ------------------     ---------------
<S>                                         <C>                      <C>               <C>                      <C>
Non interest-bearing demand                 $4,363,342                  --             $2,086,618                 ---
Interest-bearing demand                        827,094               1.76%                444,072               1.76%
Money market demand                         18,266,062               5.27%              8,316,058               5.69%
Savings deposits                               827,824               2.93%                326,895               2.89%
Time deposits                               18,506,746               6.07%              8,763,340               6.11%
Purchased funds                                  9,603               6.12%                      0               0.00%
                                           -----------               -----            -----------               -----
     Total deposits                        $42,800,671               4.97%            $19,936,983               5.14%
                                           ===========               =====            ===========               =====
</TABLE>


Net Interest  Income.  Net interest income rose from $538,898 for the year ended
December  31,  1996 to  $1,580,814  for the year ended  December  31,  1997,  an
increase of $1,041,916 or 193%.  Net interest  income  represents the difference
between  interest  income earned on earning assets and interest  expense paid on
interest bearing liabilities.











                                      -13-

<PAGE>



The  following  table sets forth an analysis of the interest  rates and interest
differential of the Company's  earning assets,  which earn interest income,  and
interest bearing liabilities, which accrue interest expense, for fiscal 1996 and
fiscal 1997. The interest  margin  increased to 3.42% in 1997 from 2.22% in 1996
as the average  cost on interest  bearing  liabilities  declined and the average
yield on total earning assets improved.
<TABLE>
<CAPTION>

                                                                        Average Balance Sheet and
                                                                     Analysis of Net Interest Income

                                                                        Year Ended December 31,

                                                              1997                                              1996

                                           Average          Related         Yield            Average          Related        Yield
                                           Balance          Interest        Rate             Balance          Interest       Rate
                                       ----------------  --------------  -----------     ----------------  --------------  ---------
Earning assets:                                                                                             
<S>                                   <C>              <C>                  <C>          <C>                 <C>             <C>  
    Time deposits in bank             $      177,939          15,740        8.85%        $     680,715          37,226       5.47%
    Investments (taxable)                  9,439,985         546,627        5.79%            5,171,489         289,707       5.60%
    Funds sold                             3,556,986         195,211        5.49%           11,642,626         614,803       5.28%
    Loans (a)                             33,004,074       2,949,301        8.94%            6,833,651         622,686       9.11%
                                          ----------       ---------        ----             ---------         -------       ---- 
                                                                                        
        Total Earning assets          $   46,178,984       3,706,879        8.03%        $  24,328,481       1,564,422       6.43%
                                          ==========       =========        ====            ==========       =========       ==== 
                                                                                          
Interest-bearing liabilities:                                                             
    NOW accounts                      $      827,094          14,547        1.76%        $     444,072           7,818       1.76%
    Savings accounts                         827,824          24,285        2.93%              326,895           9,460       2.89%
    Money market accounts                 18,266,062         963,322        5.27%            8,316,058         472,769       5.69%
    Time deposits                         18,506,746       1,123,323        6.07%            8,763,340         535,477       6.11%
    Purchased funds                            9,603             588        6.12%                    0               0       0.00%
                                          ----------       ---------        ----            ----------       ---------       ----
      Total Interest-bearing liabs    $   38,437,329       2,126,065        5.53%        $  17,850,365       1,025,524       5.75%
                                          ==========       =========        ====            ==========       =========       ==== 
                                                                                         
                                                                                        
Interest spread (b)                                    $   1,580,814        2.50%                           $  538,898       0.68%
                                                           =========        ====                               =======       ==== 
                                                                                                             
Interest margin (c)                                    $   1,580,814        3.42%                           $  538,898       2.22%
                                                           =========        ====                               =======       ==== 
                                                                                                            
----------                                                                          
(a) No loans have been placed on nonaccrual.  Loan interest  income includes net
loan fees.

(b) The interest  spread is the  difference  between the yield on earning assets
and the yield on interest-bearing liabilities.

(c) The interest  margin is the net  interest  income  divided by total  earning
assets.
</TABLE>


The following  table describes the extent to which changes in interest rates and
changes  in  the  volume  of   interest-earning   assets  and   interest-bearing
liabilities have affected the Company's interest income and interest expense for
the period  indicated.  Information is provided in each category with respect to
(i) changes  attributable to changes in volume (changes in volume  multiplied by
prior  rate),  (ii)  changes  attributable  to changes in rate  (changes in rate
multiplied  by  prior  volume),   (iii)  changes   attributable  to  changes  in
rate/volume  (changes in rate multiplied by changes in volume), and (iv) the net
change. The changes  attributable to the combined impact of volume and rate have
been allocated  proportionately to the changes due to volume and the changes due
to rate.





                                      -14-

<PAGE>

<TABLE>
<CAPTION>



                                                                       Rate/Volume Analysis of Net Interest Income
                                                                               Year Ended December 31, 1997
                                                                                       Compared to
                                                                               Year Ended December 31, 1996
                                                       ---------------------------------------------------------------------------
                                                                                       Increase (Decrease) Due To
                                                       ---------------------------------------------------------------------------
                                                             Volume                Rate             Rate/Volume           Net
                                                       ------------------   ------------------   ---------------    --------------
Earning assets:                    
<S>                                                    <C>                  <C>                  <C>                <C>            
       Time deposits in bank                           $         (27,495)   $           22,988   $       (16,979)   $      (21,486)
       Investments(taxable)                                       239,121                9,751             8,048           256,920
       Funds sold                                               (426,972)               24,156           (16,776)         (419,592)
       Loans                                                    2,384,663             (12,019)           (46,029)        2,326,615
                                                       ------------------   ------------------   ---------------    --------------
             Total Earning assets                      $        2,169,317   $           44,876   $       (71,736)   $    2,142,457
                                                       ==================   ==================   ===============    ==============

Interest-bearing liabilities:
       NOW accounts                                    $            6,743   $              (8)   $            (7)   $        6,729
       Savings accounts                                            14,496                  130               199            14,825
       Money market accounts                                      565,659             (34,194)           (40,912)          490,553
       Time deposits                                              595,363              (3,560)            (3,958)          587,845
       Purchased funds                                                  0                    0               588               588
                                                       ------------------   ------------------   ---------------    --------------
             Total interest-bearing liabilities        $        1,182,262   $         (37,632)   $       (44,090)   $    1,100,541
                                                       ------------------   ------------------   ---------------    --------------
             Net change in net interest income         $         987,056    $          82,507    $       (27,646)   $    1,041,916
                                                       ==================   ==================   ===============    ==============
</TABLE>

Provision  for  Loan  Losses.   The  provision  for  loan  losses  is  based  on
management's  evaluation  of factors such as the local and national  economy and
the risk associated with the loans in the portfolio.  The Company's  reserve for
loan losses was $624,740 at December  31, 1997  compared to $334,740 at December
31, 1996. Of the provision,  $290,000 was charged  against  earnings in 1997 and
$325,740 was charged  against  earnings in 1996.  As of December  31, 1997,  the
Company's loan loss reserve was 1.37% of outstanding  loans compared to 1.81% at
December 31, 1996. Set forth below is an analysis of the Company's provision for
loan losses.

                         Summary of Loan Loss Experience
                            And Loan Loss Provisions


                                           1997                    1996
                                    -------------------     ------------------
Beginning loan loss reserve                  $  334,740             $    9,000
Charge-offs:                                                 
           Commercial                                 0                      0
     Real Estate:                                            
           Construction                               0                      0
           Commercial                                 0                      0
           Other Mortgages                            0                      0
           Installment-consumer                       0                      0
Recoveries:
           Commercial                                 0                      0
     Real Estate:
           Construction                               0                      0
           Commercial                                 0                      0
           Other Mortgages                            0                      0
           Installment-consumer                       0                      0
                                            -----------            -----------
Net Charge-offs                                       0                      0
Additions  charged to operations                290,000                325,740
                                            -----------            -----------
Balance at end of period                     $  624,740             $  334,740 
                                            ===========            ===========

                                      -15-

<PAGE>

For each year ending  December 31, the  determination  of the  additions to loan
loss reserve  charged to operating  expenses was based on an  evaluation  of the
loan portfolio, current domestic economic conditions, and other factors.

Noninterest  Income.  Total  noninterest  income was  $729,877  for fiscal  1997
compared to $72,157  for fiscal  1996,  an  increase of $657,720 or 912%.  Total
noninterest  income consisted of service charges on deposit  accounts,  merchant
credit card processing  services,  commission income generated by the investment
center and gains on the sale of securities. The increased noninterest income for
fiscal  1997  was in  large  part  due to a gain of  $571,382  from  the sale of
securities.

Noninterest Expense.  Total noninterest expenses consisted primarily of salaries
and benefits,  occupancy and equipment expenses, data processing fees, marketing
expenses,  professional fees and other expenses.  Total noninterest expenses for
fiscal 1997 were $1,944,782  compared to $1,555,451 for fiscal 1996, an increase
of $389,331  or 25.0%.  The primary  increase  came in the area of salaries  and
benefits which increased by $301,760 or 42%. This increase occurred primarily as
a  result  of the  addition  of a  commercial  lender,  two new  retail  banking
officers,  staffing the new drive-up  facility and the president  drawing a full
year's salary.  Occupancy and equipment expenses increased by $57,739 or 19% and
other  expenses  increased by $29,832 or 6% primarily  due to the opening of the
drive-thru branch.

In fiscal 1997,  the Bank's FDIC premiums were assessed at $3,263 as required by
federal law.

Selected  Financial Ratios. Set forth below are selected financial ratios of the
Company for fiscal 1997 and fiscal 1996:

                                                      1997           1996
                                                      ----           ----
        Return on average assets                      0.08%          -4.81%
        Return on average equity                      0.70%         -19.97%
        Dividend payout ratio on common stock         None           None
        Average equity to average assets              11.98%         24.06%


Financial Condition

Total Assets.  The Company  reported total assets of $71,335,535 at December 31,
1998, an increase of $6,231,838 or 10% from December 31, 1997.

Cash and Cash  Equivalents.  Cash and due from banks was  $2,741,672 at December
31,  1998  compared to  $2,671,050  at December  31,  1997 and  represents  cash
maintained at the Bank and funds that the Bank and the Company have deposited in
other  financial  institutions.  The Bank reported  $12,525,000 of federal funds
sold on  December  31,  1998 and  $7,994,000  on December  31,  1997,  which are
inter-bank funds with daily liquidity.  The Bank's  loan-to-deposit  funds ratio
prior to loan loss  reserve on  December  31,  1998 was 76%  compared  to 78% on
December 31, 1997.

Investment  Securities.   The  Company's  investment  portfolio  decreased  from
$5,127,501  as of December  31,  1997 to  $2,365,619  at December  31, 1998 as a
result of maturing  securities.  The  proceeds of the maturing  securities  were
placed in federal funds. A portion of the securities in the Company's investment
portfolio was originally  purchased with the intent to hold the securities until
they mature.  Another  portion was placed in the  available for sale category as
the  securities  may be  liquidated  to provide cash for  operating or financing
purposes.  The book  values  of (i) U.S.  Treasuries  and (ii)  U.S.  Government
agencies and corporate  securities as of December 31, 1998 and December 31, 1997
were $2,251,819 and $5,004,501 respectively.



                                      -16-

<PAGE>



The following  table  summarizes  the maturity  dates of those  securities as of
December 31, 1998.
<TABLE>
<CAPTION>

                                                          Investment Portfolio
                                                           Repricing Schedule


                                                                   After 1 year                             
                                                                     through 5                              
                                              1 Year or less           years               Total
                                              ---------------     ---------------     --------------
Available for Sale Securities:
<S>                                          <C>                 <C>                 <C>            
    U. S. Treasury and other U. S.                                                                   
       Govt. agencies and                                                                            
       corporations                          $        250,078    $        251,406    $       501,484
         Weighted average yield                         7.25%               7.06%              6.04%
    Corporate Securities                              113,800                   0            113,800
         Weighted average yield                         0.00%               0.00%              0.00%

    Total Available For Sale                 $        363,878    $        251,406    $       615,284
                                              ---------------     ---------------     --------------
         Weighted Avg. Yield of Total                   3.46%               7.06%              4.92%

Held to Maturity Securities:
    U. S. Treasury and other U. S.                                                                   
      Govt. agencies and corporations        $        251,110    $      1,499,225    $     1,750,335
         Weighted average yield                         7.25%               6.89%              6.94%

    Total Held to Maturity                   $        251,110    $      1,499,225    $     1,750,335
                                              ---------------     ---------------     --------------
         Weighted Avg. Yield of Total                   7.25%               6.89%              6.94%


Total Securities                             $        614,988    $      1,750,631    $     2,365,619
                                                      =======       =============          =========
         Weighted Avg. Yield of Total                   5.00%               6.91%              6.42%
</TABLE>

None of the  securities  listed in the above  table  matures  after five  years.
Amortized  costs and fair values of available for sale  securities are discussed
in  Notes  C  and  D  respectively,  to  the  Company's  Consolidated  Financial
Statements.

Loans.  Loans prior to the allowance for loan losses  increased from $45,557,771
at  December  31,  1997 to  $48,869,077  at December  31,  1998,  an increase of
$3,311,306 or 7%. In addition to the $48,869,077 in loans  outstanding  that the
Bank reported on December 31, 1998,  the Bank had unfunded loan  commitments  of
$13,564,868.  Also,  during fiscal year 1998 the Bank originated  $15,632,460 in
mortgage  loans sold in the secondary  market  compared to $4,101,128  secondary
market loans originated in 1997.











                                      -17-

<PAGE>



The following  table  summarizes  the  distribution  of the  Company's  loans at
December 31, 1998 and December 31, 1997.



                                              Loan Portfolio Composition
                                                     December 31,
                                          ----------------------------------
                                              1998                    1997
                                          ----------------------------------

     Commercial                           $10,011,324          $ 14,158,697
     Real Estate:
        Construction                        3,592,246             4,640,119
        Commercial                         21,033,369            13,474,318
        Residential                         9,854,421            10,176,097
     Installment and Consumer               4,377,717             3,108,540
                                          -----------           -----------
                          Total Loans     $48,869,077           $45,557,771
                                          ===========           ===========

The following table summarizes the maturities of the Company's loan portfolio at
December  31,  1998   (excluding   residential,   real   estate,   consumer  and
installment).

<TABLE>
<CAPTION>


                                                       Loan Maturities
                             ---------------------------------------------------------------------
                                  1 year            After 1            After 5       
                                  or less       through 5 years         years            Total
                             ---------------------------------------------------------------------

<S>                          <C>              <C>                  <C>             <C>          
  Commercial                 $  12,791,109    $  16,642,901        $  1,610,683    $  31,044,693
  Real estate-construction       3,089,788          170,930             331,528        3,592,246
                                 ---------          -------             -------        ---------
                Total        $  15,880,897    $  16,813,831        $  1,942,211    $  34,636,939
                                ==========       ==========           =========       ==========
</TABLE>

The following  table  summarizes the  sensitivity of Company's loan portfolio to
interest rate changes by fixed and  adjustable-rate  loans due after one year at
December  31,  1998   (excluding   residential,   real   estate,   consumer  and
installment).



                                    Amount of Loans Due After One Year With
                              --------------------------------------------------
                                Predetermined   Floating or adj.   
                                    rates        interest rates         Total
                              --------------------------------------------------

  Commercial                  $ 14,762,091      $  3,491,493       $  18,253,584
  Real estate-construction         502,458                 0             502,458
                                ----------                 -          ----------
                Total         $ 15,264,549      $  3,491,493       $  18,756,042
                                ==========         =========          ==========
                                                                       

Non-Performing  Assets.  The Bank undertakes a continuous loan review process to
promote early  identification  of credit quality  problems in its loan portfolio
and to ensure  compliance with its loan policy and  documentation.  Any past due
loans and  identified  problem loans are reviewed with the Board of Directors of
the Bank on a monthly basis. An outside consulting firm assisted the Bank in its
loan review function in fiscal 1998.

The Bank assigns an internal loan rating to its  commercial  loans based upon an
internally  developed  rating  system.  The Bank  uses five  classifications  of
assets, three of which relate to problem assets: Substandard, Doubtful and Loss.
Substandard  assets have one or more defined weaknesses and are characterized by
a possibility  that the Bank could sustain some loss if the deficiencies are not
corrected.  Doubtful assets exhibit the same  weaknesses as Substandard  assets,
coupled with the higher possibility of loss because collection or liquidation in
full is questionable in light of current  existing  information,  conditions and
values.  An asset  classified  as Loss is considered  uncollectible  and of such
limited value that

                                      -18-

<PAGE>



continuance  as an asset  of the Bank is not  warranted.  Assets  classified  as
Substandard or Doubtful require the Bank to establish prudent general allowances
for loan losses.  If an asset or portion thereof is classified as Loss, the Bank
must either establish specific allowances for loan losses of 100% of the portion
of the asset  classified  Loss, or charge-off  such amount.  On the basis of the
most recent  comprehensive  loan review  conducted in the first quarter of 1999,
$25,000  was   classified  as  Doubtful  and  $1.5  million  was  classified  as
Substandard.  There were no loans classified as Loss. Of the assets  classified,
approximately  $493,000 were on non-accrual status.  Interest accrued and unpaid
at the time a loan is placed on non-accrual  status is charged against  interest
income.  Subsequent  payments are either  applied to the  outstanding  principal
balance or recorded as  interest  income,  depending  on the  assessment  of the
collectibility of the loan.

Each of the loans  which  becomes  contractually  past due 90 days or more as to
principal or interest  payments will be reviewed by  management  and reported to
the Loan Committee of the Board of Directors of the Bank. These loans would then
be placed on a non-accrual status.

As of December  31, 1998,  management  was not aware of any  significant  loans,
group of loans or segments of the loan portfolio not included above, where there
were serious  doubts as to the ability of the  borrowers to comply with the loan
payment terms.

The following table summarizes the Company's  nonperforming loans as of December
31, 1998 and December 31, 1997.


                                                         December 31,
                                               -------------------------------
                                                    1998            1997
                                               -------------------------------

    Non-accrual Loans                            $  492,540       $     0
    Accruing Loans, Past Due 90 Days+ (1)        $        0       $     0
    Restructured Loans (2)                       $        0       $     0
                                                                
    (1) Loans are generally placed in non-accrual when contractually past due 90
        days or more.
    (2) There were no restructured loans for each of the presented years.


For fiscal 1998 and fiscal 1997 the gross interest  income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original terms was $27,585 and $0,  respectively,  none of which was recognized.
The amount of interest  income on  non-accruing  loans that was  included in net
income for fiscal 1998 was $64,157 and $0 for fiscal 1997.

Allowance for Loan Losses. The Company's allowance for estimated loan losses was
$562,747,  or 1.15% of loans at December 31, 1998 compared to $624,740, or 1.37%
of loans at December  31, 1997.  See  "Comparison  of Operating  Results for the
Years Ended  December  31,  1998 and  December  31,  1997 -  Provision  for Loan
Losses."

Management  believes that the majority of risk in the Bank's loan portfolio lies
in commercial  loans,  which  include  commercial  real estate and  construction
loans.  Accordingly,  the Bank has allocated $255,595 (or 45% of the reserve for
loan losses) to these loans, which comprise about 71% of the loan portfolio. The
Bank has allocated  $9,080 (or  approximately 2% of the reserve for loan losses)
to  residential  mortgages,  which  comprise  about  20% of the loan  portfolio.
Consumer loans comprise about 9% of the loan portfolio, and $38,839 (or about 7%
of the reserve for loan  losses) is allocated  to consumer  loans.  The Bank has
allocated  $6,782 of the reserve for loan losses to unfunded  loan  commitments,
which  total  approximately  $13,564,867.  The  balance of the  reserve for loan
losses of $252,451 is unallocated.

Other  Assets.  The  Company's  office  building,   leasehold  improvements  and
equipment less accumulated depreciation and amortization decreased to $1,376,660
at December 31, 1998 from $1,403,082 at December 31, 1997.


                                      -19-

<PAGE>



On December 31, 1998,  the Bank had  $1,297,835 in Other Real Estate Owned which
is represented by 19 fully improved  residential lots and 2 partially  completed
model homes.  The Bank  purchased  these real estate assets from the  bankruptcy
court in fiscal 1997 after the Bank's  borrower filed for  bankruptcy.  The Bank
has a contract for the exclusive build-out of those lots by an area builder. All
of this real estate has been placed for sale. The Bank holds executed  offers to
purchase on the 2 models that will produce proceeds of  approximately  $419,400.
The Bank  anticipates the remaining  parcels of land will be liquidated over the
next 18 months.

Accrued  interest  receivable on loans and other assets increased to $663,617 at
December 31, 1998 compared to $495,109 at December 31, 1997.

Deposits.  The Bank experienced  significant  deposit growth during fiscal 1998.
Total deposits  increased by $6,035,231 from $58,487,625 as of December 31, 1997
to $64,522,856 on December 31, 1998.

As of December 31, 1998, time deposits over $100,000  represented 6.36% of total
deposits.  Set forth below is a schedule of the  maturities  as of December  31,
1998 for the Company's time deposits of $100,000 or more.

                                 Time Deposits of $100,000 or more
                                          Maturity Schedule


                            3 mos.      Over 3 mos.  Over 6 mos.
                            or less     thru 6 mos.  thru 12 mos.  Over 12 mos.

Certificates of Deposit    $  719,651  $   408,160   $  2,975,965   $       0

Other Liabilities. Accrued interest payable and other liabilities of $614,535 at
December  31, 1998  compared  to  $752,772 at December  31, 1997 were made up of
accrued interest payable on deposit accounts and accounts payable.

Liquidity.  For  banks,  liquidity  generally  represents  the  ability  to meet
withdrawals  from  deposits  and the funding of loans.  The assets that  provide
liquidity are cash,  federal  funds sold and  short-term  loans and  securities.
Liquidity  needs are  influenced  by  economic  conditions,  interest  rates and
competition. Management believes that current liquidity levels are sufficient to
meet future demands.  Management  believes the current liquidity position of the
Bank allows it  opportunity  to expand the Bank's loan portfolio and account for
any deposit  withdrawals  which may occur.  As of December 31, 1998 the Bank had
$15,884,605, primarily in federal funds, available to meet future demands.

Capital  Resources.  The Bank's most recent  notification as of February 4, 1998
from the FDIC  categorized  the Bank as  well-capitalized  under the  regulatory
framework for prompt corrective  action. To be categorized as  well-capitalized,
the Bank must maintain the minimum  total  risk-based,  Tier I  risk-based,  and
leverage  ratios  as set  forth in  "Description  of  Business--Supervision  and
Regulation."  There have been no conditions or events since these  notifications
that management  believes will change the Bank's  classification.  See Note R to
the Company's Consolidated Financial Statements.

The Company has made a commitment to the Federal Reserve Bank of Chicago that it
will not incur any debt until December 7, 2000,  without prior approval from the
Federal  Reserve  System.  The Bank has met its  commitment  to the FDIC that it
would maintain a Tier I capital to total asset ratio of not less than 8% for its
first three years of operations, which ended in December 1998.

Asset/Liability  Management.  Closely  related to  liquidity  management  is the
management of  interest-earning  assets and  interest-bearing  liabilities.  The
Company  manages  its rate  sensitivity  position  to avoid  wide  swings in net
interest margins and to minimize risk due to changes in interest rates.


                                      -20-

<PAGE>



Changes in net interest income,  other than volume related  changes,  arise when
interest  rates on assets  reprice in a time frame or interest rate  environment
that is different  from the  repricing  period for  liabilities.  Changes in net
interest  income also arise from changes in the mix of interest  earning  assets
and interest-bearing liabilities.

The Company currently does not expect to experience any material fluctuations in
its net  interest  income in the  short  term as a  consequence  of  changes  in
interest rates.

The Company's strategy with respect to asset/liability management is to maximize
net interest income while limiting exposure to potential downward movement. This
strategy is implemented by the Bank's management,  which takes action based upon
its analysis of the Bank's present positioning,  its desired future positioning,
economic  forecasts,  and  its  goals.  The  Company's  goal  is to  maintain  a
cumulative GAP of +or- 25% of assets at the 0 to 359 day time frame.


The following table  summarizes the repricing  opportunities  as of December 31,
1998 for each major  category  of  interest-bearing  asset and  interest-bearing
liability:
<TABLE>
<CAPTION>

                                               Interest Rate-Sensitive Assets
                                                       and Liabilities
                                                       (In thousands)


                                               0-89       90-179     180-359     360+   
                                               Days        Days       Days       Days       Total
<S>                                       <C>            <C>       <C>         <C>       <C>      
                       Investments        $       365        0        252       1,749    $   2,366
                             Loans        $    24,238    5,667     14,403       4,561    $  48,869
--------------------------------------------------------------------------------------------------
       Total Rate Sensitive Assets        $    24,603    5,667     14,655       6,310    $  51,235
     Rate Sensitive Liabilities (1)       $    41,103    3,147      9,888       1,833    $  55,971
--------------------------------------------------------------------------------------------------
                               GAP        $  (16,500)    2,520      4,767       4,477    
                    Cumulative GAP        $  (16,500) (13,980)    (9,213)      (4,736)
GAP/Rate Sensitive Assets                     (59.9%)  (46.2%)    (20.5%)      (9.2%)
</TABLE>
                                           
                                             
    (1) Savings,  NOW,  and Money  Market  Demand  Deposits  are  considered  as
        immediately repricable.


The larger negative Gap position of the Company in the 0-89 day time frame was a
result of maturing  Certificates of Deposit  shifting into the more liquid Money
Market accounts due to a general decline in market interest rates.


Impact of Inflation and Changing Prices

Unlike most industries,  essentially all of the assets and liabilities of a bank
are  monetary  in nature.  As such,  the level of prices has less effect than do
interest  rates.  Prices  and  interest  rates  do not  always  move in the same
direction.  The  Company's  consolidated  financial  statements  and  notes  are
generally  prepared  in terms of  historical  dollars  without  considering  the
changes in the relative purchasing power of money over time due to inflation.




                                      -21-

<PAGE>



Year 2000 Impact

Existing computer programs generally recognize dates and perform calculations by
using only the last two digits of any given year.  These  computer  programs may
not  recognize a year that begins  with "20"  instead of "19." As a result,  the
functions  of  computer   software,   hardware  and  embedded  systems  at  many
businesses,  including the Bank,  may experience  failures or produce  incorrect
results  when the  calendar  changes to January 1,  2000.  Systems  failures  or
miscalculations  at the Bank or the Bank's  vendors or  customers  may result in
disruption of operations,  including a failure to process  information  and/or a
reduced likelihood of collecting loan payments on a timely basis.

The Bank's Readiness.  To determine whether and to what extent it may experience
disruptions  as a result of the turning of the Year 2000  ("Y2K"),  the Bank has
established   a  committee  to  oversee  the   assessment   process  and  report
periodically  to Bank  management.  The  Bank is  currently  in the  process  of
assessing  (i) the Y2K status of its own internal  systems,  including  computer
equipment  (hardware),   applications   (software),   and  other  electronically
controlled equipment that does not process data (embedded systems); (ii) the Y2K
status of its  vendors'  systems;  and (iii)  the Y2K  status of its  customers'
systems.

The Bank has completed  testing or received  manufacturer  certification  of Y2K
compliance with respect to 100% of its internal  hardware and embedded  systems.
All such systems appear to be Y2K compliant. The Bank spent approximately $1,500
on testing these systems to date and does not expect to incur  additional  costs
in testing internal computer hardware or embedded systems.

The following  chart displays the current status of the Bank's  mission-critical
software with respect to assessing Y2K compliance.



                                        Vendor-                           
 Internal Mission-critical Software   certified                           
          Category                    Compliant?  Status of Testing/Replacement
------------------------------------  ---------- ------------------------------
Operating systems                         Yes    Testing complete-satisfactory
Banking platform applications             Yes    Testing Phase 1 complete -  
                                                 satisfactory Phase 2 - in 
                                                 process - satisfactory to date
On-line PC banking                        Yes    Testing in process - 
                                                 satisfactory
Telephone banking                          No    Replacement installation in 
                                                 process
Loan documentation                        Yes    Replacement configuration in
                                                 process
Document management                       Yes    Testing complete - satisfactory
Contact management                        Yes    Testing complete - satisfactory
General office applications               Yes    Testing complete - satisfactory
Data warehousing                          Yes    Testing complete - satisfactory

All the systems are vendor-certified  compliant except for the telephone banking
system.  This  system is in the  process of being  upgraded  to a Y2K  compliant
version. The hardware is in place and the conversion is expected to be completed
by April 1, 1999. This conversion is being done at no cost to the Bank.


                                      -22-

<PAGE>



The  remaining  systems  have all been  successfully  tested for Y2K  readiness,
except for the loan  documentation  system.  This system is being configured and
should  be  operational  by the  end of  April,  1999.  Both  the  current  loan
documentation  system and its  replacement  have been certified Y2K ready by the
vendor.

The  platform  banking  system went through a series of tests in May of 1998 and
passed  successfully.  Because of the critical nature of these systems, the Bank
is currently undertaking a second round of testing of this software.

The Bank may  experience  loan  collection or other  credit-related  problems if
significant  customers are not Y2K compliant before the turn of the century.  In
order to  assess  their  Y2K  compliance,  the Bank  has sent Y2K  surveys  to a
majority of its commercial customers.  Many of these customers have responded to
the  Bank's  inquiries  and  continue  to  update  the Bank as new data  becomes
available.  The Bank intends to continue  surveying new customers as appropriate
to assess  their Y2K  readiness.  To date,  the Bank has  received  satisfactory
responses from most of its major commercial customers,  and management currently
does not  anticipate  the Bank  will  experience  material  adverse  effects  on
operations as a result of customer non-compliance.

Similarly,  the Bank is receiving regular updates from almost all of the vendors
who provide  mission-critical  products and services. The Bank is making efforts
to contact those vendors who have not yet provided  information  regarding their
Y2K readiness.  Of those vendors whose  compliance  status is known to the Bank,
all are either already  compliant or appear to be making  satisfactory  progress
toward compliance.

Y2K  Compliance  Costs.  The  Bank  outsources  a  majority  of its  information
processing,  and its  internal  computer  systems  generally  rely  on  software
provided by third-party  vendors. As a result, the Bank has incurred very little
cost to date, less than $5,000,  in assessing its internal  readiness.  The Bank
will incur additional  remediation  costs which are not expected to be material,
generally  in  connection  with (i) its  continuing  dialogue  with  vendors and
customers to assess their readiness, (ii) the installation of one new system and
the  replacement of one old system,  and (iii)  contingency  planning and status
updates.  The Bank currently  expects that such additional costs will not exceed
$15,000.

Y2K Risks.  The most  significant  Y2K risks to the Bank are associated with the
potential non-compliance of its third-party vendors who provide mission-critical
services.  Since  the Bank  outsources  most of its  information  processing  to
third-party  vendors,  such a failure  could result in higher  operating  costs,
increased  staffing  needs  or the  inability  to  provide  needed  services  to
customers.   Likewise,   the  failure  of  those  vendors   providing   critical
infrastructure services, specifically, power and communications, could result in
temporary operational difficulties at the bank.

Y2K failures of the Bank's significant  commercial customers could result in the
inability  of those  customers  to make timely  payments  on loans,  potentially
resulting in a loss of revenue,  adjustments  to the Bank's loan loss  reserves,
reduced deposit balances or increased cash requirements.

Another  area of risk to the Bank  lies with  consumer  deposit  behavior.  If a
significant  number  of  customers  were  to  withdraw  substantial  amounts  of
deposits, the Bank could face a shortage of liquid assets.  Management currently
intends to maintain additional levels of cash on hand to meet potential demands,
and expects to be able to meet such cash demands satisfactorily.


The Bank does not anticipate  material failures of its embedded  systems,  since
virtually none of these systems rely on date- based control systems.

Contingency  Plans. The Bank is currently  developing  contingency plans to deal
with  potential  business  interruptions  caused  by Y2K  non-compliance  of its
vendors,  customers  or internal  systems.  These plans  address a wide range of
potential  problems.  The Bank's plan is about 80% complete,  and should be 100%
complete sometime in the second quarter of 1999.



                                      -23-

<PAGE>



Although  the Bank has taken  many steps to ensure  that Y2K will not  adversely
impact  its  results  of  operations  or  financial  condition,  there can be no
assurance that it will not have such an effect. Whether the Bank will experience
adverse  effects  as a result of Y2K will  depend on certain  risks and  factors
including risks  associated with (i) Y2K readiness of the vendors who supply the
Bank with critical information  processing,  credit delivery and other services;
(ii) Y2K readiness of the Bank's key commercial  customers;  (iii) unanticipated
expenses associated with ongoing assessment or remediation of potential internal
Y2K  problems  which  could  affect the Bank's  operations;  (iv) the  potential
inadequacy or failure of the testing  procedures  used by the Bank in performing
its internal Y2K assessments; (v) the inaccuracy of Y2K compliance certification
received by the Bank from  certain  outside  vendors  regarding  those  vendors'
systems  which are used by the Bank;  and (vi) the failure of the Bank to design
adequate   contingency   plans  in  the  event  of  internal  or  external   Y2K
non-compliance.



                                      -24-

<PAGE>
<TABLE>
<CAPTION>




          DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
                              Average Balance Sheet

                                                              1998                     1997
                                                      --------------------    -----------------------
<S>                                                    <C>                    <C>                
 Cash and due from banks                               $     1,913,542        $         1,411,013
 Federal funds sold and securities purchased under           7,721,729                  3,556,986
 agreement to resell                                                           
 Interest-bearing deposits in other banks                       56,955                     72,096
 Investment securities:                                                        
     U.S. Treasury agency and other                          3,690,491                  9,439,985
     Unrealized Gain (Loss) on securities                                      
 Loans:                                                                        
     Real estate mortgages                                  12,264,601                  8,527,547
     Consumer-net                                            3,684,486                  2,094,599
     Commercial and other                                   33,022,799                 22,381,928
                                                            ----------                 ----------
          Total                                             48,971,886                 33,004,074
     Less allowance for loan losses                          (544,812)                   (335,534)
                                                            ----------                 ----------
          Net loans                                         48,427,074                 32,668,540
 Investment in subsidiary                                            0         
 Fixed assets                                                1,364,536                  1,475,555
 Other real estate owned                                     1,461,638                    416,353
 Other assets                                                  942,182                    389,910
                                                            ----------                 ----------
          Total assets                                 $    65,578,147        $        49,430,438
                                                            ==========                 ==========
 Interest-bearing deposits:                                                    
     NOW accounts                                      $     1,454,223        $           827,094
     Savings accounts                                        1,258,761                    827,824
     Money Market deposit accounts                          24,363,265                 18,266,062
     Time deposits                                          25,075,721                 18,506,746
                                                            ----------                 ----------
          Total interest-bearing deposits                   52,151,970                 38,427,726
     Demand deposits                                         6,489,825                  4,363,343
                                                            ----------                 ----------
           Total deposits                                   58,641,795                 42,791,069
 Other liabilities                                           1,021,300                    714,924
                                                            ----------                 ----------
           Total liabilities                                59,663,095                 43,505,993
 Equity capital                                              5,915,052                  5,919,445
                                                            ----------                 ----------
           Total liabilities and capital               $    65,578,147        $        49,425,438
                                                            ==========                 ==========  
</TABLE>


                                      -25-

<PAGE>

                                                          
                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
RidgeStone Financial Services, Inc.
Brookfield, Wisconsin

We have  audited the  accompanying  consolidated  balance  sheets of  RidgeStone
Financial  Services,  Inc.  as of December  31,  1998 and 1997,  and the related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for the years ended December 31, 1998, 1997 and 1996.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these 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 audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  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 RidgeStone Financial
Services,  Inc.  as of  December  31,  1998 and  1997,  and the  results  of its
operations  and its cash flows for the years ended  December 31, 1998,  1997 and
1996, in conformity with generally accepted accounting principles.

                                             VIRCHOW, KRAUSE & COMPANY, LLP
                                             /s/Virchow, Krause & Company, LLP

Brookfield, Wisconsin
January 29, 1999


                                      -26-

<PAGE>

<TABLE>
<CAPTION>


RIDGESTONE FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
----------------------------------------------------------------------------------------------------------------------
ASSETS                                                                                 1998               1997
-------------------------------------------------------------------------------- ------------------ ------------------
<S>                                                                              <C>                <C>            
   Cash and due from banks (Note B)                                              $     2,741,672    $     2,671,050
   Interest-bearing deposits in banks                                                      2,649              4,185
   Federal funds sold                                                                 12,525,000          7,994,000
   Available for sale securities stated at fair value (Note C)                           615,284            874,406
   Held to maturity securities, fair value of $1,780,700 and $4,298,356 in                                            
      1998 and 1997 respectively (Note D)                                              1,750,335          4,253,095
   Loans, less allowance for loan losses of $562,747 and $624,740 in 1998 and                                         
      1997 respectively (Notes E, F and O)                                            48,306,330         44,933,031
   Mortgage loans held for sale                                                          259,000            701,250
   Office building, leasehold improvements and equipment, net (Note G)                 1,376,660          1,403,082
   Other real estate                                                                   1,297,835          1,774,489
   Cash surrender value of life insurance (Note L)                                     1,797,153                  -
   Accrued interest receivable and other assets (Note J)                                 663,617            495,109
                                                                                 ------------------ ------------------
         Total assets                                                            $    71,335,535    $    65,103,697
                                                                                 ================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------
Liabilities:
   Deposits: (Note H)
      Demand                                                                     $     8,552,053    $     7,296,264
      Savings and NOW accounts                                                        34,013,384         28,221,885
      Other Time                                                                      21,957,419         22,969,476
                                                                                 ------------------ ------------------
         Total deposits                                                               64,522,856         58,487,625
   Accrued interest payable and other liabilities (Note J)                               614,535            752,772
                                                                                 ------------------ ------------------
         Total liabilities                                                            65,137,391         59,240,397
                                                                                 ------------------ ------------------
Commitments and contingencies (Notes M, N and S)

Stockholders' equity: (Note P)
   Preferred stock, no par value; 2,000,000 and -0- shares authorized in 1998                                         
      and 1997 respectively, no shares issued and outstanding                                  -                  -
   Common stock, no par value; 10,000,000 and 1,000,000 shares authorized in                                          
      1998 and 1997 respectively, 876,492 and 834,340 shares issued and                                               
      outstanding in 1998 and 1997 respectively                                        8,417,117          8,411,732
   Retained deficit (Notes Q, R and S)                                                (2,196,449)        (2,527,826)
                                                                                 ------------------ ------------------
                                                                                       6,220,668          5,883,906
   Accumulated other comprehensive loss                                                  (22,524)           (20,606)
                                                                                 ------------------ ------------------
         Total stockholders' equity                                                    6,198,144          5,863,300
                                                                                 ------------------ ------------------
         Total liabilities and stockholders' equity                              $    71,335,535    $    65,103,697
                                                                                 ================== ==================

See Notes to Consolidated Financial Statements.
</TABLE>

                                      -27-
<PAGE>

<TABLE>
<CAPTION>


RIDGESTONE FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------------------------------------------------------
                                                                       1998              1997             1996
                                                                 ----------------- ----------------- -----------------
Interest income:
<S>                                                              <C>                <C>               <C>          
   Interest on fees and loans (Note E)                           $  4,284,718       $ 2,949,301       $     622,686
   Interest on securities - taxable                                   237,396           546,627             289,707
   Interest on federal funds sold                                     411,276           195,211             614,803
   Interest on deposits in banks                                        7,553            15,740              37,226
                                                                 ----------------- ----------------- -----------------
      Total interest income                                         4,940,943         3,706,879           1,564,422
                                                                 ----------------- ----------------- -----------------
Interest expense:
   Interest on deposits (Note H)                                    2,881,181         2,125,477           1,025,524
   Interest on federal funds purchased                                      -               588                   -
                                                                 ----------------- ----------------- -----------------
      Total interest expense                                        2,881,181         2,126,065           1,025,524
                                                                 ----------------- ----------------- -----------------
      Net interest income before provision for loan losses          2,059,762         1,580,814             538,898
Provision for loan losses (Note F)                                     65,000           290,000             325,740
                                                                 ----------------- ----------------- -----------------
      Net interest income after provision for loan losses           1,994,762         1,290,814             213,158
                                                                 ----------------- ----------------- -----------------
Noninterest income:
   Service charges on deposit accounts                                 40,532            24,418               7,829
   Secondary market loan fees                                         153,275            32,932              19,302
   Gain (loss) on sale of securities, net (Note C)                     (7,687)          571,382              22,500
   Other                                                               96,052           101,145              22,526
                                                                 ----------------- ----------------- -----------------
      Total noninterest income                                        282,172           729,877              72,157
                                                                 ----------------- ----------------- -----------------
Noninterest expenses:
   Salaries and employee benefits (Notes K and L)                   1,129,696         1,021,304             719,544
   Occupancy expenses (Notes G and M)                                 260,134           205,833             130,901
   Equipment expenses (Note G)                                        130,922           150,507             167,700
   Professional fees                                                  169,483           137,767              92,889
   Data processing fees                                               104,626            91,346              80,632
   Other                                                              342,899           338,025             363,785
                                                                 ----------------- ----------------- -----------------
         Total noninterest expenses                                 2,137,760         1,944,782           1,555,451
                                                                 ----------------- ----------------- -----------------
         Income (loss) before income taxes                            139,174            75,909          (1,270,136)
Less applicable income taxes (benefits) (Note J)                     (192,203)           34,276                 934
                                                                 ----------------- ----------------- -----------------
      Net income (loss)                                          $    331,377      $     41,633      $   (1,271,070)
                                                                 ================= ================= =================
      Earnings (loss) per share: 
             Basic                                               $       0.38      $       0.05      $        (1.52)
                                                                 ================= ================= =================
             Diluted                                             $       0.37      $       0.05      $        (1.52)
                                                                 ================= ================= =================
      Weighted average shares outstanding                             876,239           834,340             834,340
                                                                 ================= ================= =================

See Notes to Consolidated Financial Statements.
</TABLE>

                                      -28-

<PAGE>

<TABLE>


RIDGESTONE FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------------------------------------------------------
                                                                                       Accumulated                    
                                                                                          other                       
                                                      Common           Retained       comprehensive                   
                                                       stock           earnings       income (loss)        Total
                                                  ----------------------------------- --------------------------------
                                                                                                       
<S>                                               <C>              <C>               <C>               <C>         
Balances, December 31,1995                        $  7,721,399     $   (608,056)     $          -      $  7,113,343
                                                                                                       ---------------
   Comprehensive income (loss):
      Net loss                                               -       (1,271,070)                -        (1,271,070)
      Change in net unrealized gain (loss) on                                                                         
        available for sale securities, net of                                                                         
        reclassification adjustment and tax                                                                           
        effect                                               -                -            25,732            25,732
                                                                                                       ---------------
          Total comprehensive income (loss)                                                              (1,245,338)
                                                  -------------------------------------------------------------------
                                                                                                       
Balances, December 31, 1996                          7,721,399       (1,879,126)           25,732         5,868,005
                                                                                                       ---------------
   Comprehensive income (loss):
      Net Income                                             -           41,633                 -            41,633
      Change in net unrealized gain (loss) on                                                                         
        available for sale securities, net of                                                                         
        reclassification adjustment and tax                                                                           
        effect                                               -                -           (46,338)          (46,338)
                                                                                                       ---------------
          Total comprehensive income (loss)                                                                  (4,705)
                                                  --------------------------------------------------------------------
                                                                                                       
Balances, December 31, 1997                          7,721,399       (1,837,493)          (20,606)        5,863,300
                                                                                                       ---------------
   Comprehensive income:
      Net income                                             -          331,377                 -           331,377
      Change in net unrealized gain (loss) on                                                                         
        available for sale securities, net of                                                                         
        reclassification adjustment and tax                                                                           
        effect                                               -                -            (1,918)           (1,918)
                                                                                                       ---------------
          Total comprehensive income                                                                        329,459
                                                                                                       ---------------
   5% Stock dividend (Note P)                          690,333         (690,333)                -                 -
   Issuance of 437 new shares of stock for the                                                                        
     exercise of stock options (Note P)                  5,385                -                 -             5,385
                                                  --------------------------------------------------------------------
Balances, December 31, 1998                       $  8,417,117     $ (2,196,449)     $    (22,524)     $  6,198,144
                                                  ================ ================= ================= ===============

See Notes to Consolidated Financial Statements.
</TABLE>

                                      -29-
<PAGE>

<TABLE>
<CAPTION>


RIDGESTONE FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
----------------------------------------------------------------------------------------------------------------------
                                                                        1998             1997              1996
                                                                  ----------------- ---------------- -----------------
Cash flows from operating activities:
<S>                                                               <C>               <C>              <C>          
   Net income (loss)                                              $    331,377      $     41,633     $ (1,271,070)
                                                                  ----------------- ---------------- -----------------
   Adjustment to reconcile  net income  (loss) to net cash
     provided by (used in) operating activities:
       Depreciation                                                    170,166           184,473          182,032
       Provision for loan losses                                        65,000           290,000          325,740
       Provision (benefit) for deferred taxes                         (202,500)                -                -
       (Gain) loss on sale of investment securities                      7,687          (571,382)         (22,500)
       Amortization and accretion of bond premiums and                                                                
         discounts - net                                                  (839)           (1,752)               -
       Amortization of organizational costs                                  -             2,120            2,275
       Net (increase) decrease in mortgage loans held for sale         442,250           143,850         (845,100)
       Net increase in cash surrender value of life insurance       (1,797,153)                -                -
       (Increase) decrease in assets:
         Interest receivable                                            36,466          (227,625)        (200,631)
         Other assets                                                   (2,474)          (21,948)           2,352
       Increase (decrease) in liabilities:
         Accrued interest                                               18,860           260,671          250,002
         Other liabilities                                            (157,097)          223,232           13,418
                                                                  ----------------- ---------------- -----------------
           Total adjustments                                        (1,419,634)          281,639         (292,412)
                                                                  ----------------- ---------------- -----------------

           Net cash provided by (used in) operating activities      (1,088,257)          323,272       (1,563,482)
                                                                  ----------------- ---------------- -----------------
Cash flows from investing activities:
   Net decrease in interest-bearing deposits in banks                    1,536           180,452        2,259,394
   Net (increase) decrease in federal funds                         (4,531,000)        5,265,000       (7,632,000)
   Purchase of available for sale securities                          (138,200)       (1,994,683)     (10,339,643)
   Proceeds from sales of available for sale securities                391,316         2,701,397        9,335,817
   Proceeds from maturities of held to maturity securities           2,500,000           750,000          500,000
   Purchase of held to maturity securities                                   -                 -       (5,505,361)
   Purchase of office building, leasehold improvements and                                                            
     equipment                                                        (143,744)          (76,333)        (636,516)
   Net expenditures on other real estate                              (186,681)       (1,125,790)               -
   Proceeds from sales of other real estate                            663,335                 -                -
   Net increase in loans                                            (3,438,299)      (27,665,473)     (17,811,227)
                                                                  ----------------- ---------------- -----------------
           Net cash used in investing activities                    (4,881,737)      (21,965,430)     (29,829,536)
                                                                  ----------------- ---------------- -----------------


                                      -30-

<PAGE>

<CAPTION>


RIDGESTONE FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(concluded)
Years ended December 31, 1998, 1997 and 1996
---------------------------------------------------------------------------------------------------------------
                                                                     1998            1997            1996
                                                                --------------- --------------- ---------------
Cash flows from financing activities:
<S>                                                             <C>             <C>             <C>          
    Proceeds from stock options exercised                       $       5,385   $           -   $           -
    Net increase in deposits                                        6,035,231      22,818,965      32,360,129
                                                                --------------- --------------- ---------------
           Net cash provided by financing activities                6,040,616      22,818,965      32,360,129
                                                                --------------- --------------- ---------------
           Increase in cash and due from banks                         70,622       1,176,807         967,111

Cash and due from banks:
    Beginning                                                       2,671,050       1,494,243         527,132
                                                                --------------- --------------- ---------------
    Ending                                                      $   2,741,672   $   2,671,050   $   1,494,243
                                                                =============== =============== ===============
Supplemental disclosures of cash flow information: 
     Cash paid for:
       Interest                                                 $   2,862,321   $   1,865,394   $     775,522
                                                                =============== =============== ===============
       Income taxes                                             $      10,297   $      30,096   $         934
                                                                =============== =============== ===============
Supplemental schedule of non-cash investing and financing 
    activities: 
     Net change in unrealized gain on available for sale        $      (1,918)  $     (46,338)  $      25,732
                                                                =============== =============== ===============
    Transfer of foreclosed assets from loans to other assets    $           -   $     648,699   $           -
                                                                =============== =============== ===============

See Notes to Consolidated Financial Statements.

</TABLE>

                                      -31-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note A.  Summary of Significant Accounting Policies

1.     Consolidation:

The consolidated  financial  statements of RidgeStone  Financial Services,  Inc.
(the "Company") include the accounts of its wholly owned subsidiary,  RidgeStone
Bank (the "subsidiary  Bank"). The consolidated  financial  statements have been
prepared in conformity with generally accepted accounting principles and conform
to general practices within the banking industry.  All significant  intercompany
accounts and  transactions  have been eliminated in the  consolidated  financial
statements.

2.     Nature of banking activities:

The consolidated  income (loss) of the Company is principally from income of its
subsidiary.  The subsidiary Bank grants commercial,  installment and residential
loans and accepts deposits from customers  primarily in southeastern  Wisconsin.
The subsidiary Bank is subject to competition from other financial  institutions
and nonfinancial  institutions providing financial products.  Additionally,  the
Company  and the  subsidiary  Bank are  subject  to the  regulations  of certain
regulatory  agencies  and  undergo  periodic  examinations  by those  regulatory
agencies.

3.     Basis of financial statement presentation:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the period.  Actual results
could differ from those estimates.

4.     Cash and cash equivalents:

For purposes of reporting cash flows,  cash and cash  equivalents are defined as
those amounts included in the balance sheet caption "cash and due from banks".

The subsidiary Bank maintains amounts due from banks which, at times, may exceed
federally insured limits.  The subsidiary Bank has not experienced any losses in
such accounts.

5.     Reclassifications:

Certain  1996 and 1997  amounts  have been  reclassified  to conform to the 1998
presentation.

6.     Available for sale securities:

Securities  classified as available for sale are those debt  securities that the
Company and its subsidiary Bank intend to hold for an indefinite period of time,
but not necessarily to maturity.  Any decision to sell a security  classified as
available  for sale would be based on  various  factors,  including  significant
movements  in interest  rates,  changes in the  maturity  mix of the  subsidiary
Bank's assets and liabilities, liquidity needs, regulatory capital consideration
and other  similar  factors.  Securities  classified  as available  for sale are
carried at fair value.  Unrealized  gains or losses are reported as increases or
decreases  in  comprehensive  income,  net of the related  deferred  tax effect.
Realized  gains or  losses,  determined  on the  basis  of the cost of  specific
securities sold, are included in earnings.


                                      -32-
<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note A.  Summary of Significant Accounting Policies (continued)

7.     Held to maturity securities:

Securities  classified as held to maturity are those debt securities the Company
and its  subsidiary  Bank have both the intent and  ability to hold to  maturity
regardless  of  changes  in market  conditions,  liquidity  needs or  changes in
general economic conditions.  These securities are carried at cost, adjusted for
amortization  of premium and  accretion  of  discount,  computed by the interest
method over their contractual  lives. The sale of a security within three months
of its maturity date or after collection of at least 85 percent of the principal
outstanding  at the time the security was acquired is  considered a maturity for
purposes of classification and disclosure.

8.     Loans:

Loans that  management  has the intent and  ability to hold for the  foreseeable
future  or until  maturity  or  payoff  are  reported  at the  amount  of unpaid
principal,  reduced  by the  allowance  for loan  losses.  Interest  on loans is
calculated  by  using  the  simple  interest  method  on daily  balances  of the
principal amount  outstanding.  The accrual of interest income on impaired loans
is discontinued when, in the opinion of management, there is reasonable doubt as
to the  borrower's  ability to meet payment of interest or  principal  when they
become due. When interest accrual is  discontinued,  all unpaid accrued interest
is  reversed.  Cash  collections  on  impaired  loans are  credited  to the loan
receivable  balance,  and no interest  income is recognized on those loans until
the principal balance is current.  Accrual of interest is generally resumed when
the  customer is current on all  principal  and  interest  payments and has been
paying on a timely basis for a period of time.

Loan fees and certain direct loan  origination  costs are deferred,  and the net
fee or cost is recognized as an adjustment to interest income using the interest
method  over  the  contractual  life  of  the  loans,   adjusted  for  estimated
prepayments based on the subsidiary Bank's historical prepayment experience.

9.     Mortgage loans held for sale:

Mortgage  loans  originated  and intended for sale in the  secondary  market are
carried at the lower of cost or  estimated  market value in the  aggregate.  Net
unrealized  losses are  recognized  through a valuation  allowance by charges to
income.
All sales are made without recourse.

10.    Allowance for loan losses:

The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management  believes that the  collectibility of the principal is unlikely.  The
allowance for loan losses is adequate to cover probable  credit losses  relating
to specifically  identified loans, as well as probable credit losses inherent in
the balance of the loan  portfolio.  In  accordance  with  Financial  Accounting
Standards Board  Statements 5 and 114, the allowance is provided for losses that
have been  potentially  incurred as of the balance sheet date.  The allowance is
based on past events and current economic  conditions,  and does not include the
effects of expected losses on specific loans or groups of loans that are related
to future events or expected  changes in economic  conditions.  While management
uses the best information  available to make its evaluation,  future adjustments
to the allowance may be necessary if there are  significant  changes in economic
conditions.  Impaired  loans are 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 loan's  observable market price or the fair value of
the collateral if the loan is collateral  dependent.  A loan is impaired when it
is probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.


                                      -33-
<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note A.  Summary of Significant Accounting Policies (continued)

10.    Allowance for loan losses: (continued)

In addition,  various regulatory agencies  periodically review the allowance for
loan losses. These agencies may require the subsidiary Bank to make additions to
the allowance for loan losses based on their judgments of  collectibility  based
on information available to them at the time of their examination.

11.    Office building, leasehold improvements and equipment:

Depreciable assets are stated at cost less accumulated depreciation.  Provisions
for depreciation are computed on straight-line and accelerated  methods over the
estimated  useful lives of the assets,  which are 39 years for office  buildings
and leasehold improvements and 3 to 7 years for equipment.

12.    Other real estate:

Other real estate  owned,  acquired  through  partial or total  satisfaction  of
loans,  is carried at the lower of cost or fair value less cost to sell.  At the
date of acquisition losses are charged to the allowance for loan losses. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate.

13.    Profit-sharing plan:

The Company has established a trusteed  contributory 401(k)  profit-sharing plan
for  qualified  employees.  The  Company's  policy is to fund  contributions  as
accrued.

14.    Income taxes:

The  Company  files a  consolidated  federal  income tax  return and  individual
subsidiary state income tax returns. Accordingly,  amounts equal to tax benefits
of those  companies  having taxable  federal losses or credits are reimbursed by
the other companies that incur federal tax liabilities.

Amounts  provided  for  income  tax  expense  are based on income  reported  for
financial statement purposes and do not necessarily  represent amounts currently
payable under tax laws.  Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible  amounts in the future
based on  enacted  tax laws and rates  applicable  to the  periods  in which the
differences  are expected to affect  taxable  income.  As changes in tax laws or
rates are enacted,  deferred tax assets and liabilities are adjusted through the
provision for income taxes.  The differences  relate  principally to the reserve
for loan losses,  operating  loss  carrryforwards  and fixed  assets.  Valuation
allowances are  established  when necessary to reduce deferred tax assets to the
amount expected to be realized.

15.    Off-balance-sheet financial instruments:

In the  ordinary  course of  business,  the  subsidiary  Bank has  entered  into
off-balance-sheet  financial  instruments  consisting of  commitments  to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby  letters of credit.  Such financial  instruments are recorded in the
financial  statements  when they are  funded or  related  fees are  incurred  or
received.


                                      -34-
<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note A.  Summary of Significant Accounting Policies (continued)

16.    Earnings per share data:

Earnings  (loss) per common share data has been computed based upon the weighted
average number of shares  outstanding  during the period.  In the computation of
diluted  earnings  per share,  all  dilutive  stock  options  are  assumed to be
exercised  at the  beginning  of each year and the proceeds are used to purchase
shares of the  Company's  common  stock at the average  market  price during the
year.

17.    Fair value of financial instruments:

Financial Accounting Standards Board Statement No. 107,  "Disclosures About Fair
Value of Financial  Instruments,"  requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is  practicable  to estimate  that value.  In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation  techniques.  Those techniques are significantly  affected by
the assumptions  used,  including the discount rate and estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent  markets and, in many cases,  could not be realized
in immediate  settlement of the instrument.  Statement No. 107 excludes  certain
financial  instruments  from  its  disclosure  requirements.   Accordingly,  the
aggregate fair value amounts  presented do not represent the underlying value of
the Company.

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

       Carrying amounts approximate fair values for the following instruments:


              Cash and cash equivalents
              Federal funds sold
              Interest-bearing deposits in banks
              Accrued interest receivable
              Accrued interest payable
              Variable rate loans that reprice  frequently  where no significant
                   change in credit risk has occurred
              Mortgage loans held for sale
              Demand deposits
              Variable rate money market accounts
              Variable  rate   certificates   of  deposit   Available  for  sale
                   securities
              Cash surrender value of life insurance

       Quoted market prices:

       Where  available,  or if not available,  based on quoted market prices of
       comparable  instruments  for the following  instrument: 

              Held to maturity securities

       Discounted cash flows:

       Using interest rates currently being offered on instruments  with similar
       terms and with similar  credit  quality: 

              All loans except variable rate loans described above
              Fixed rate certificates of deposit

                                      -35-
<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note A.  Summary of Significant Accounting Policies (continued)

17.    Fair value of financial instruments: (continued)

       Quoted fees currently being charged for similar instruments:

       Taking  into  account  the  remaining  terms  of the  agreements  and the
       counterparties' credit standing:

              Off-balance-sheet instruments:
                     Guarantees
                     Letters of credit
                     Lending commitments

Since the majority of the Company's  off-balance-sheet  instruments  consists of
nonfee-producing,  variable rate commitments, the Company has determined it does
not have a distinguishable fair value.

Note B.  Cash and Due from Banks

The  Company's  subsidiary  Bank is required  to maintain  vault cash or reserve
balances with Federal  Reserve Banks based upon a percentage of deposits.  These
requirements  approximated  $112,000  and $58,000 at December  31, 1998 and 1997
respectively.

Note C.  Available for Sale Securities

Amortized  costs and fair values of available for sale securities as of December
31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>

                                                                  December 31, 1998
                                           ----------------------------------------------------------------
                                                                Gross           Gross                      
                                              Amortized       unrealized      unrealized         Fair
                                                cost            gains           losses          Values
                                           ---------------- --------------- --------------- ---------------
<S>                                        <C>              <C>             <C>             <C>         
U.S. Treasury securities                   $    249,608     $        470    $          -    $    250,078
Obligations of other U.S. government                                                                       
agencies and corporations                       250,000            1,406               -         251,406
                                           ---------------- --------------- --------------- ---------------
                                                499,608            1,876               -         501,484
Equity securities                               138,200                -          24,400         113,800
                                           ---------------- --------------- --------------- ---------------
                                           $    637,808     $      1,876    $     24,400    $    615,284
                                           ================ =============== =============== ===============
                                                                  December 31, 1997
                                           ----------------------------------------------------------------
                                                                Gross           Gross                      
                                              Amortized       Unrealized      unrealized         Fair
                                                cost            gains           losses          Values
                                           ---------------- --------------- --------------- ---------------
U.S. Treasury securities                   $    496,009     $      2,350    $          -    $    498,359
Obligations of other U.S. government                                                                       
agencies and corporations                       250,000            3,047               -         253,047
                                           ---------------- --------------- --------------- ---------------
                                                746,009            5,397               -         751,406
Equity securities                               149,003            1,000          27,003         123,000
                                           ---------------- --------------- --------------- ---------------
                                           $    895,012     $      6,397    $     27,003    $    874,406
                                           ================ =============== =============== ===============
</TABLE>


                                      -36-
<PAGE>


RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note C.  Available for Sale Securities (continued)

The  amortized  cost  and fair  value of  available  for sale  securities  as of
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from  contractual  maturities in other equity  securities  since the
anticipated maturities are not readily determinable. Therefore, these securities
are not included in the maturity categories in the following summary:

                                                      December 31, 1998
                                                -------------------------------
                                                  Amortized          Fair
                                                     cost           value
                                                --------------- ---------------
Due in one year or less                         $    249,608    $    250,078
Due after one year through 5 years                   250,000         251,406
                                                --------------- ---------------
                                                $    499,608    $    501,484
                                                =============== ===============

Realized  gains  and  losses  on sale of  available  for sale  securities  as of
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>

                                                                             December 31,
                                                           -------------------------------------------------
                                                                 1998             1997            1996
                                                           ----------------- --------------- ---------------
<S>                                                        <C>               <C>             <C>         
Proceeds from sales of available for sale securities       $    391,316      $  2,701,397    $  9,355,817
                                                           ================= =============== ===============
Gross gains on sales                                       $     23,748      $    574,885    $     22,500
Gross losses on sales                                           (31,435)           (3,503)              -
                                                           ----------------- --------------- ---------------
                                                           $     (7,687)     $    571,382    $     22,500
                                                           ================= =============== ===============
Related income taxes (benefits)                            $     (3,036)     $     34,276    $          -
                                                           ================= =============== ===============
</TABLE>

Note D.  Held to Maturity Securities

Amortized  costs and fair values of held to maturity  securities  as of December
31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>

                                                                 December 31, 1998
                                          ----------------------------------------------------------------
                                                               Gross           Gross                      
                                             Amortized       unrealized      unrealized         Fair
                                               costs           gains           losses          value
                                          ---------------- --------------- --------------- ---------------
<S>                                       <C>              <C>             <C>             <C>         
U.S. Treasury securities                  $  1,000,335     $     21,931    $          -    $  1,022,266
Obligations of other U.S. government                                                                      
   agencies and corporations                   750,000            8,434               -         758,434
                                          ---------------- --------------- --------------- ---------------
                                          $  1,750,335     $     30,365    $          -    $  1,780,700
                                          ================ =============== =============== ===============
</TABLE>



<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Note D.  Held to Maturity Securities (continued)

                                                                   December 31, 1997
                                            ----------------------------------------------------------------
                                                                 Gross           Gross                      
                                               Amortized       unrealized      unrealized         Fair
                                                 cost            gains           losses          value
                                            ---------------- --------------- --------------- ---------------
<S>                                         <C>              <C>             <C>             <C>         
U.S. Treasury securities                    $  2,503,095     $     22,764    $          -    $  2,525,859
Obligations of other U.S. government                                                                        
   agencies and corporations                   1,750,000           22,497               -       1,772,497
                                            ---------------- --------------- --------------- ---------------
                                            $  4,253,095     $     45,261    $          -    $  4,298,356
                                            ================ =============== =============== ===============
</TABLE>

The amortized cost and fair value of held to maturity  securities as of December
31, 1998, by contractual maturity, are shown below:

                                                     December 31, 1998
                                               -------------------------------
                                                 Amortized          Fair
                                                    cost           value
                                               --------------- ---------------
Due in one year or less                        $    251,110    $    254,219
Due after one year through five years             1,499,225       1,526,481
                                               --------------- ---------------
                                               $  1,750,335    $  1,780,700
                                               =============== ===============

Note E.  Loans

Major classifications of loans are as follows:

                                                        December 31,
                                               -------------------------------
                                                    1998            1997
                                               --------------- ---------------
Commercial                                     $ 10,011,324    $ 14,158,697
Real Estate:
   Construction                                   3,592,246       4,640,119
   Commercial                                    21,033,369      13,474,318
   Residential                                    9,854,421      10,176,097
Installment and consumer                          4,377,717       3,108,540
                                               --------------- ---------------
                                                 48,869,077      45,557,771
Allowance for loan losses                          (562,747)       (624,740)
                                               --------------- ---------------
     Net loans                                  $48,306,330     $44,933,031
                                               =============== ===============

Impairment of loans having recorded  investment at December 31, 1998 of $492,540
has been recognized in conformity with FASB Statement No. 114 as amended by FASB
Statement  No. 118.  There were no  impaired  loans at December  31,  1997.  The
average  recorded  investment in impaired  loans during 1998 was  $365,672.  The
total allowance for loan losses related to these loans was $-0- for December 31,
1998.  Interest  income on  impaired  loans of $64,157 was  recognized  for cash
payments received in 1998.

                                      -38-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note E.  Loans (continued)

Certain directors, executive officers and principal shareholders of the Company,
and their related  interests,  had loans outstanding in the aggregate amounts of
$3,576,818  and  $3,969,100 at December 31, 1998 and 1997  respectively.  During
1998,  $3,809,332 of new loans were made with  $4,201,614 of  repayments.  These
loans were made on substantially  the same terms,  including  interest rates and
collateral,  as those  prevailing at the same time for  comparable  transactions
with other persons and did not involve more than normal risks of  collectibility
or present other unfavorable features.

Note F.  Allowance for Loan Losses

The allowance for loan losses reflected in the consolidated financial statements
represents the allowance available to absorb loan losses. An analysis of changes
in the allowance is presented in the following tabulation:

                                                           December 31,
                                                  ------------------------------
                                                       1998            1997
                                                  --------------- --------------
Balance, beginning                                $    624,740    $    334,740
   Loans charged off                                  (126,993)              -
   Recoveries on loans previously charged off                -               -
   Provision charged to operations                      65,000         290,000
                                                  --------------- --------------
Balance, ending                                   $    562,747    $    624,740
                                                  =============== ==============

Note G.  Office Building, Leasehold Improvements and Equipment

Office  building,  leasehold  improvements and equipment are stated at cost less
accumulated depreciation and amortization and are summarized as follows:

                                                           December 31,
                                                  ------------------------------
                                                       1998            1997
                                                  --------------- --------------
Land                                              $     72,200    $     72,200
Building and leasehold improvements                  1,034,147       1,034,147
Furniture and equipment                                900,613         756,869
                                                  --------------- --------------
                                                     2,006,960       1,863,216
   Less accumulated depreciation and amortization      630,300         460,134
                                                  --------------- --------------
         Total office building, leasehold                                       
             improvements and equipment           $  1,376,660    $  1,403,082
                                                  =============== ==============

Depreciation  and  amortization  expense  amounted  to  $170,166,  $184,473  and
$182,032 in 1998, 1997 and 1996 respectively.

Note H.  Deposits

The  aggregate  amount of other  Time  deposits  (including  CD's),  each with a
minimum denomination of $100,000, was $4,103,776 and $5,530,343 in 1998 and 1997
respectively.

                                      -39-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note H.  Deposits (continued)

At December 31, 1998,  the  scheduled  maturities  of other Time deposits are as
follows:

   1999                                              $        20,123,967
   2000                                                          454,149
   2001                                                          907,555
   2002                                                           36,968
   2003                                                          434,780
                                                     ----------------------
                                                     $        21,957,419
                                                     ======================

Note I.  Interest on Deposits

Interest expense on deposits is as follows:
<TABLE>
<CAPTION>

                                                             December 31,
                                      -----------------------------------------------------------
                                             1998                1997                1996
                                      ------------------- ------------------- -------------------
<S>                                    <C>                 <C>                 <C>           
Interest bearing demand accounts       $       25,039      $       14,547      $        7,818
Money market demand accounts                1,289,270             963,323             472,769
Savings deposits                               34,839              24,285               9,460
Time, $100,000 and over                       315,703             248,636              94,837
Time, under $100,000                        1,216,330             874,686             440,640
                                      ------------------- ------------------- -------------------
         Total                        $     2,881,181     $     2,125,477     $     1,025,524
                                      =================== =================== ===================
</TABLE>

Note J.  Income taxes

The  provision  for  income  taxes  included  in the  accompanying  consolidated
financial statements consists of the following:
<TABLE>
<CAPTION>

                                                                                  December 31,
                                                           -----------------------------------------------------------
                                                                  1998                1997                1996
                                                           ------------------- ------------------- -------------------
Current taxes:
<S>                                                        <C>                 <C>                 <C>            
   Federal                                                 $             -     $             -     $             -
   State                                                            10,297              34,276                 934
                                                           ------------------- ------------------- -------------------
                                                                    10,297              34,276                 934
                                                           ------------------- ------------------- -------------------
Deferred income taxes (benefit):
   Federal                                                        (170,100)                  -                   -
   State                                                           (32,400)                  -                   -
                                                           ------------------- ------------------- -------------------
                                                                  (202,500)                  -                   -
                                                           ------------------- ------------------- -------------------
         Total provision (benefit) for income taxes        $      (192,203)    $        34,276     $           934
                                                           =================== =================== ===================
</TABLE>

At December 31, 1998,  the Company had a net  operating  loss  carryforward  for
income tax purposes of approximately $1,101,092 which, if not utilized to reduce
taxable  income in future  periods,  will expire at  December  31,  2011.  As of
December  31,  1998,  management  believes it is more likely than not,  that the
deferred income tax benefit of $202,500 will be fully realized.

                                      -40-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note J.  Income Taxes (continued)

The following amounts make up the deferred tax assets and liabilities reduced by
a valuation allowance:

                                                         December 31,
                                                -------------------------------
                                                     1998            1997
                                                --------------- ---------------
Deferred tax assets:
   Allowance for loan losses                    $    143,989    $    144,502
   Depreciation                                            -          14,834
   Start up costs                                     75,633         101,876
   Net operating loss carryforward                   433,280         412,467
   Deferred compensation                              19,478          11,850
   Other                                                   -           7,099
Deferred tax liabilities:
   Depreciation                                       (2,280)              -
   Other                                             (10,151)              -
Valuation                                           (457,449)       (692,628)
                                                --------------- ---------------
                                                $    202,500    $          -
                                                =============== ===============
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                           ---------------------------------------------------------------
                                                                      1998                              1997
                                                           ----------------------------     ------------------------------
                                                                             % of                               % of
                                                                            pretax                             pretax
                                                              Amount        income             Amount          income
                                                           ------------- -------------- --- -------------- ---------------
<S>                                                        <C>                <C>           <C>                  <C>  
Reconciliation of statutory to effective taxes:
   Federal income taxes at statutory rate                  $   47,319         34.0%         $    25,809          34.0%
   Adjustmens for:
     Increases in taxes resulting                                                                                         
       from state income taxes                                  6,178          4.4               22,622          29.8
     Reduction of deferred tax valuation allowance           (235,179)      (162.5)             (14,155)        (18.6)
     Other - net                                              (10,521)       (14.0)                   -           -
                                                           ------------- -------------- --- -------------- ---------------
         Effective income taxes - operations               $ (192,203)      (138.1)%        $    34,276          45.2%
                                                           ============= ============== === ============== ===============
</TABLE>

Note K.  Profit-Sharing Plan

The  Company  established  a 401(k) plan during  1996.  The Company  contributed
$20,592, $28,700 and $16,650 in 1998, 1997 and 1996 respectively.

Note L.  Salary Continuation Agreement

During  1998,  the Company  entered  into salary  continuation  agreements  with
various executive officers.  The agreements provide for the payment of specified
amounts upon the employees'  retirement or death which is being accrued over the
anticipated remaining period of employment.

Although not part of the agreements,  the Company purchased paid-up split dollar
life  insurance on the  officers.  The insurance  could provide  funding for the
payments of benefits.

                                      -41-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note M.  Facilities Lease

Lease expense for the years ended December 31, 1998,  1997 and 1996 was $94,235,
$81,936 and $88,771  respectively.  The lease term which is accounted  for as an
operating lease,  expires on May 31, 2000, requires monthly base rental payments
of $6,828 and has two five-year renewal options. The Company also has the option
of purchasing the building upon the fourth  anniversary of the  commencement  of
the lease for $1,000,000.

In connection with the lease of the subsidiary  Bank's main office,  the Company
paid broker's  commissions to an entity whose principals are an organizer of the
subsidiary Bank and a director of the Company,  in the amount of $3,812,  $4,518
and $6,584 in 1998, 1997 and 1996  respectively.  Additional  commissions may be
payable if the Company  exercises its options for further lease terms and if the
Company later  purchases the shopping mall in which the subsidiary Bank premises
are located.

Minimum future rental payments under the noncancelable operating lease are:

Year ending December 31,
   1999                                                 $            81,936
   2000                                                              34,140
                                                        ----------------------
     Total minimum future rental payments               $           116,076
                                                        ======================

Note N.  Commitments and Contingencies

In the normal  course of  business,  the Company is  involved  in various  legal
proceedings.  In the opinion of  management,  any liability  resulting from such
proceedings  would  not  have a  material  adverse  effect  on the  consolidated
financial statements.

The Company is 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, financial guarantees
and standby letters of credit.  They involve,  to varying  degrees,  elements of
credit risk in excess of amounts recognized on the consolidated balance sheet.

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 and
standby letters of credit is represented by the  contractual  notional amount of
those  instruments.  The  Company  uses  the  same  credit  policies  in  making
commitments  and  issuing  letters  of  credit  as it does for  on-balance-sheet
instruments.

A summary of the  contract  or  notional  amount of the  Company's  exposure  to
off-balance-sheet risk as of December 31 is as follows:

                                                      1998            1997
                                                 --------------- --------------
Financial instruments whose contract amounts 
represent credit risk:
   Commitments to extend credit                  $   12,754,818  $  12,031,882
   Credit card commitments                       $      781,350  $     599,716
   Commercial letters of credit                  $       28,700  $     137,680

                                      -42-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note N.  Commitments and Contingencies (continued)

Commitments  to extend  credit are  agreements  to lend to a customer as long as
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 many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent  future cash  requirements.  Standby letters of credit are conditional
commitments  issued to guarantee the performance of a customer to a third party.
Those  guarantees are primarily  issued to support public and private  borrowing
arrangements.  The  credit  risk  involved  in  issuing  letters  of  credit  is
essentially the same as that involved in extending loan facilities to customers.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of  collateral  obtained,  if deemed  necessary  by the Company  upon
extension  of  credit,  is  based  on  management's  credit  evaluation  of  the
counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
inventory,  property and equipment, and income-producing  commercial properties.
Credit card commitments are unsecured.

The Company and the  subsidiary  Bank do not engage in the use of interest  rate
swaps, futures, forwards or option contracts.

Note O.  Concentration of Credit Risk

Practically all of the subsidiary Bank's loans, commitments,  and commercial and
standby  letters of credit  have been  granted to  customers  in the  subsidiary
Bank's  market  area.  Although  the  subsidiary  Bank  has a  diversified  loan
portfolio,  the ability of its debtors to honor their  contracts is dependent on
the economic  conditions of the counties  surrounding  the subsidiary  Bank. The
concentration of credit by type of loan is set forth in Note E.

Note P.  Stockholders' Equity

In 1996, the Company established The RidgeStone  Financial  Services,  Inc. 1996
Stock Option Plan (the "Plan")  which was  approved by the  shareholders  at the
1997 annual  meeting,  providing  for the  granting of options to purchase up to
100,000 shares of common stock to key officers and employees of the Company.  In
1998, the Plan was amended to provide for the granting of options to purchase up
to 500,000  shares.  Options granted to date under the Plan have been granted at
the fair  market  value of the common  stock on the date of the  grant.  Options
granted to date under the Plan may be exercised  33.33% per year  beginning  one
year after the date of the grant and must be exercised within a ten year period.

                                      -43-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note P.  Stockholders' Equity (continued)

Activity of the Plan is summarized in the following table:
<TABLE>
<CAPTION>

                                              Weighted-                                                               
                                               average                                                    Weighted-
                                              fair value                                                   average
                                              of option        Options                      Options        exercise
                                               granted        available    Exercisable    outstanding       price
                                            --------------- -------------- ------------- --------------- -------------
<S>                                              <C>            <C>                          <C>             <C>   
Balance, December 31, 1995                                            -                           -
   Stock options authorized                                     100,000                           -
   Granted                                       $4.10          (49,025)                     49,025          $11.75
                                                            --------------               ---------------
Balance, December 31, 1996                                       50,975             -        49,025           11.75
   Granted                                       $3.92          (49,000)                     49,000           14.63
   Canceled                                                       1,150                      (1,150)          12.50
                                                            --------------               ---------------
Balance, December 31, 1997                                        3,125        16,057        96,875           13.20
   Additional stock options authorized                          400,000                           -
   Stock dividend                                                20,153                       4,847           13.20
   Exercise of stock options                                          -                        (437)          12.32
   Granted                                       $6.06          (52,050)                     52,050           18.50
   Canceled                                                       2,923                      (2,923)          17.24
                                                            --------------               ---------------
Balance, December 31, 1998                                      374,151        50,174       150,412          $14.96
                                                            ==============               ===============
</TABLE>

The Company applies APB Opinion 25 and related  interpretation in accounting for
its Plan.  Accordingly,  no compensation  cost has been recognized for the Plan.
Had compensation  cost for the Plan been determined based upon the fair value at
the grant  dates for awards  under the Plan  consistent  with the method of FASB
Statement  123, the Company's net income and earnings per share would be reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                     1998              1997              1996
                                               ----------------- ----------------- -----------------
<S>                                            <C>               <C>               <C>            
Net income - as reported                       $     331,337     $      41,633     $   (1,271,070)
   Pro forma                                   $     248,306     $       1,692     $   (1,271,070)
Basic earnings per share - as reported         $        0.38     $        0.05     $        (1.52)
   Pro forma                                   $        0.28     $           -     $        (1.52)
Diluted earnings per share - as reported       $        0.37     $        0.05     $        (1.52)
   Pro forma                                   $        0.28     $           -     $        (1.52)

</TABLE>

                                      -44-
<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note P.  Stockholders' Equity (continued)
<TABLE>
<CAPTION>

                                                                                      Per share
                                                   Income             Shares            amount
                                              ------------------ ----------------- -----------------
1998:
<S>                                           <C>                     <C>          <C>          
   Earnings per share                         $       331,337         876,239      $        0.38
                                                                                   =================
   Effect of options                                        -          13,118
                                              ------------------ -----------------
   Earnings per share - assuming dilution     $       331,337         889,357      $        0.37
                                              ================== ================= =================
1997:
   Loss per share                             $        41,633         834,340      $        0.05
                                                                                   =================
   Effect of options                                        -          12,056
                                              ------------------ -----------------
   Loss per share - assuming dilution         $        41,633         846,396      $        0.05
                                              ================== ================= =================
1996:
   Loss per share                             $    (1,271,070)        834,340      $       (1.52)
                                                                                   =================
   Effect of options                                        -               -
                                              ------------------ -----------------
   Loss per share - assuming dilution         $    (1,271,070)        834,340      $       (1.52)
                                              ================== ================= =================
</TABLE>

At the annual  shareholders'  meeting on April 28,  1998,  an  amendment  to the
Company's Articles of Incorporation was approved increasing the shares of common
stock authorized for issuance to 10,000,000.

The  Articles  of  Incorporation  were  also  amended  to  establish  a class of
preferred stock and authorize 2,000,000 shares for issuance.

On May 21, 1998, the Company  declared a five percent (5%) stock  dividend.  The
dividend totaled 41,715 shares.

Note Q.  Retained Earnings and Restriction on Dividends

Under  Wisconsin law, the subsidiary Bank is restricted as to the maximum amount
of  dividends  it may pay on its  common  stock.  A  Wisconsin  bank may not pay
dividends except out of net profits. Unless exempted by the Wisconsin Department
of  Financial  Institutions,  Division of Banking,  a state bank may not pay any
dividend  until an amount equal to at least 20% of net profits for the preceding
half year or dividend period has been transferred to surplus. Such transfers are
required  until the  surplus  fund equals 100% of the bank's  capital  stock.  A
bank's  ability to pay dividends may also be restricted in the event that losses
in excess of undivided  profits have been charged against surplus and in certain
other  circumstances.  Federal regulators have authority to prohibit a bank from
engaging  in any  action  deemed by them to  constitute  an  unsafe  or  unsound
practice,  including  the payment of  dividends.  In addition to the  foregoing,
Wisconsin  business  corporations  such as the subsidiary Bank are prohibited by
Wisconsin law from paying  dividends  while they are insolvent or if the payment
of dividends would render them unable to pay debts as they come due in the usual
course of business.


                                      -45-
<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note Q.  Retained Earnings and Restriction on Dividends (continued)

Federal Reserve Board policy provides that a bank holding company should not pay
dividends  unless (i) the  dividends  can be fully funded out of net income from
the Company's net earnings over the prior year and (ii) the prospective  rate of
earnings  retention  appears  consistent with the Company's (and its subsidiary)
capital needs, asset quality and overall financial conditions.

Note R.  Regulatory Capital Requirements

The  subsidiary  Bank is  subject  to various  regulatory  capital  requirements
administered by the federal and state banking agencies.  Failure to meet minimum
capital  requirements can initiate certain  mandatory,  and possibly  additional
discretionary,  actions by regulators  that, if undertaken,  could have a direct
material effect on the subsidiary  Bank's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the  subsidiary  Bank  must  meet  specific  capital   guidelines  that  involve
quantitative measures of the subsidiary Bank's assets, liabilities,  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
subsidiary  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 subsidiary Bank to maintain minimum amounts and ratios (set forth in
the table on the following  page) of total and Tier 1 capital (as defined in the
regulations)  to  risk-weighted  assets  (as  defined)  and Tier 1  capital  (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, the subsidiary Bank meets all capital adequacy requirements to which it is
subject.

As of December  31,  1998,  the most  recent  notification  from the  regulatory
agencies  categorized the Company and subsidiary Bank as well-capitalized  under
the  regulatory  framework for prompt  corrective  action.  To be categorized as
well-capitalized,  the Company and subsidiary  Bank must maintain  minimum total
risk-based,  Tier I risk-based,  and leverage  ratios as set forth in the table.
There are no  conditions  or events since these  notifications  that  management
believes have changed the subsidiary Bank's category.

Listed on the  following  page is a  comparison  of the Company  and  subsidiary
Bank's 1998 and 1997 actual with the minimum  requirements for  well-capitalized
and adequately capitalized banks, as defined by the federal regulatory agencies'
Prompt Corrective Action Rules:

                                      -46-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


Note R.  Regulatory Capital Requirements (continued)

                                                                                                     To be well
                                                                                                  capitalized under
                                                                          For capital             prompt corrective
                                                Actual                 adequacy purposes          action provisions
                                       -------------------------- ---------------------------- ------------------------
                                          Amount        Ratio         Amount         Ratio       Amount       Ratio
                                       ------------- ------------ --------------- ------------ ------------ -----------
As of December 31, 1998: 
<S>                                   <C>               <C>       <C>                <C>       <C>          
 Total capital (to risk-weighted 
    assets):
      RidgeStone Financial                                                                                             
         Services, Inc.               $   6,783,415     12.4%     $   4,372,779      8.0%      $         N/A
      RidgeStone Bank                     6,281,463     11.6%         4,349,713      8.0%        5,437,141    10.0%
   Tier I capital (to risk-weighted
    assets):
      RidgeStone Financial                                                                                             
         Services, Inc.               $   6,220,668     11.4%     $   2,186,389      4.0%      $         N/A
      RidgeStone Bank                     5,718,716     10.5%         2,147,856      4.0%        3,262,285     6.0%
   Tier I capital (to average 
    assets):
      RidgeStone Financial                                                                                             
         Services, Inc.               $   6,220,668     8.2%      $   3,047,520      4.0%      $         N/A
      RidgeStone Bank                     5,718,716     8.2%          2,791,280      4.0%        3,489,100     5.0%
As of December 31, 1997:
   Total capital (to risk-weighted 
    assets):
      RidgeStone Financial                                                                                             
         Services, Inc.               $   6,493,883     13.3%     $   3,902,674      8.0%      $         N/A
      RidgeStone Bank                     5,457,770     11.4%         3,810,246      8.0%        4,762,808    10.0%
   Tier I capital (to risk-weighted 
    assets):
      RidgeStone Financial                                                                                             
         Services, Inc.               $   5,883,906     12.1%     $   1,951,337      4.0%      $         N/A
      RidgeStone Bank                     4,842,056     10.2%         1,905,123      4.0%        2,857,685     6.0%
   Tier I capital (to average 
    assets):
      RidgeStone Financial                                                                                             
         Services, Inc.               $   5,883,906     10.5%     $   2,234,412      4.0%      $         N/A
      RidgeStone Bank                     4,842,056     9.9%          1,961,142      4.0%        2,451,428     5.0%
</TABLE>

Note S.  Regulatory Restriction

RidgeStone Financial Services, Inc. (Holding Company only) has made a commitment
to the Federal  Reserve  Bank,  Chicago not to incur any debt until the later of
August  31,  2000 or five  years  from the date of  consummation  of  operation,
(December 7, 1995) without prior approval from the Federal Reserve Bank.

                                      -47-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note T.  Fair Values of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>

                                                December 31, 1998                          December 31, 1997
                                     ----------------------------------------     -------------------------------------
                                          Carrying            Estimated               Carrying          Estimated
                                           amount             fair value               amount           fair value
                                     ----------------------------------------------------------------------------------
Financial assets:
<S>                                  <C>                  <C>                     <C>               <C>             
   Cash and due from banks           $      2,741,672     $       2,741,672       $      2,671,050  $      2,671,050
                                     ==================== =================== === ================= ===================
   Interest-bearing deposits in                                                                                        
   banks                             $          2,649     $           2,649       $          4,185  $          4,185
                                     ==================== =================== === ================= ===================
   Federal funds sold                $     12,525,000     $      12,525,000       $      7,994,000  $      7,994,000
                                     ==================== =================== === ================= ===================
   Available for sale securities     $        615,284     $         615,284       $        874,406  $        874,406
                                     ==================== =================== === ================= ===================
   Held to maturity securities       $      1,750,335     $       1,780,700       $      4,253,095  $      4,298,356
                                     ==================== =================== === ================= ===================
   Net loans                         $     48,306,330     $      48,614,751       $     44,933,031  $     45,075,126
                                     ==================== =================== === ================= ===================
   Mortgage loans held for sale      $        259,000     $         259,000       $        701,250  $        701,250
                                     ==================== =================== === ================= ===================
   Cash surrender value of life                                                                                        
   insurance                         $      1,797,153     $       1,797,153       $              -  $              -
                                     ==================== =================== === ================= ===================
   Accrued interest receivable       $        394,273     $         394,273       $        430,739  $        430,739
                                     ==================== =================== === ================= ===================
Financial liabilities
   Deposits                          $     64,522,856     $      64,561,674       $     58,487,625  $     58,489,781
                                     ==================== =================== === ================= ===================
   Accrued interest payable          $        533,454     $         533,454       $        514,594  $        514,594
                                     ==================== =================== === ================= ===================
</TABLE>

The estimated fair value of fee income on letters of credit at December 31, 1998
and 1997 is insignificant. Loan commitments on which the committed interest rate
is less than the current market rate are also insignificant at December 31, 1998
and 1997.

The Company  assumes  interest  rate risk (the risk that general  interest  rate
levels  will  change) as a result of its normal  operations.  As a result,  fair
values of the  Company's  financial  instruments  will change when interest rate
levels  change and that change may be either  favorable  or  unfavorable  to the
company.  Management  attempts to match  maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with  fixed  rate  obligations  are less  likely  to  prepay  in a  rising  rate
environment and more likely to prepay in a falling rate environment. Conversely,
depositors  who are  receiving  fixed rates are more  likely to  withdraw  funds
before  maturity  in a rising  rate  environment  and less  likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities  and attempts to minimize  interest rate risk by adjusting  terms of
new loans and deposits and by investing in  securities  with terms that mitigate
the Company's overall interest rate risk.

                                      -48-

<PAGE>


RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note U.  RidgeStone  Financial  Services,  Inc.  (Parent Company only) Financial
Information

<TABLE>
<CAPTION>

CONDENSED BALANCE SHEETS
                                                                                       December 31,
                                                                         -----------------------------------------
ASSETS                                                                          1998                 1998
--------------------------------------------------------------------------------------------- --------------------
<S>                                                                      <C>                  <C>              
    Cash and due from banks                                              $         274,880    $         374,160
    Interest-bearing deposits in banks                                               2,649                4,185
    Available for sale securities stated at fair value                             113,800              123,000
    Investment in subsidiary                                                     5,720,592            4,847,453
    Other real estate                                                               81,222              512,000
    Other assets                                                                    14,199               11,619
                                                                         -------------------- --------------------

         Total assets                                                    $       6,207,262    $       5,872,417
                                                                         ==================== ====================

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------- --------------------

Liabilities - other liabilities                                          $           9,118    $           9,117
                                                                         -------------------- --------------------

Stockholders' equity:
    Preferred stock, no par value; 2,000,000 and -0- shares authorized                                            
       in 1998 and 1997 respectively, no shares issued and outstanding                  --                   --
    Common stock, no par value; 10,000,000 and 1,000,000 shares                                                   
       authorized in 1998 and 1997 respectively, 876,492 and 834,340                                              
       shares issued and outstanding in 1998 and 1997 respectively               8,417,117            8,411,732
    Retained deficit                                                            (2,196,449)          (2,527,826)
    Accumulated other comprehensive loss                                           (22,524)             (20,606)
                                                                         -------------------- --------------------
         Total stockholders' equity                                              6,198,144            5,863,300
                                                                         -------------------- --------------------
         Total liabilities and stockholders' equity                      $       6,207,262    $       5,872,417
                                                                         ==================== ====================
</TABLE>

                                      -49-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note U.  RidgeStone  Financial  Services,  Inc.  (Parent Company only) Financial
Information (continued)
<TABLE>
<CAPTION>

CONDENSED STATEMENTS OF INCOME

                                                                                  December 31,
                                                           -----------------------------------------------------------
                                                                  1998                1997                1996
                                                           ------------------- ------------------- -------------------
Income:
<S>                                                        <C>                 <C>                 <C>            
    Interest                                               $         7,553     $        15,742     $        37,226
    Gain (loss) on sale of securities                               (7,687)            569,429              22,500
    Other                                                            3,364                   -               1,900
                                                           ------------------- ------------------- -------------------
         Total income                                                3,230             585,171              61,626
                                                           ------------------- ------------------- -------------------
Expenses:
    Salaries and employee benefits                                   2,827               9,532               3,766
    Occupancy and depreciation                                           -                   -               7,892
    Other                                                           42,889              41,914              31,097
                                                           ------------------- ------------------- -------------------
         Total expenses                                             45,716              51,446              42,755
                                                           ------------------- ------------------- -------------------
         Income (loss) before income taxes and 
           equity in undistributed loss at 
           subsidiary                                              (42,486)            533,725              18,871
Income taxes                                                         7,797              34,251                   -
                                                           ------------------- ------------------- -------------------
         Income (loss) before equity in undistributed                                                                 
           loss at subsidary                                       (50,283)            499,474              18,871
Equity in undistributed net income (loss) at subsidiary            381,660            (457,841)         (1,289,941)
                                                           ------------------- ------------------- -------------------
         Net income (loss)                                 $       331,377     $        41,633     $    (1,271,070)
                                                           =================== =================== ===================
</TABLE>

                                      -50-

<PAGE>



RIDGESTONE FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note U.  RidgeStone  Financial  Services,  Inc.  (Parent Company only) Financial
Information (continued)
<TABLE>
<CAPTION>

CONDENSED STATEMENTS OF CASH FLOWS

                                                                                      December 31,
                                                                   ---------------------------------------------------
                                                                         1998              1997             1996
                                                                   ----------------- ----------------- ---------------
Cash flows from operating activities:
<S>                                                                <C>               <C>               <C>            
    Net income (loss)                                              $       331,377   $        41,633   $   (1,271,070)
                                                                   ----------------- ----------------- ---------------
    Adjustments to reconcile net income (loss) to net cash 
     provided by (used in) operating activities:
       Depreciation                                                              -                 -             5,983
       (Gain) loss on sale of investment securities                          7,687          (569,429)          (22,500)
       Amortization of organizational costs                                      -             2,120             2,120
       (Increase) decrease in other assets                                  (2,500)             (265)               48
       Increase in other liabilities                                             1               264                 -
       Equity in undistributed (income) loss of subsidiary                (381,660)          457,841         1,289,941
                                                                   ----------------- ----------------- ---------------
         Total adjustments                                                (376,472)         (109,469)        1,275,592
                                                                   ----------------- ----------------- ---------------
         Net cash provided by (used in) operating activities               (45,095)          (67,836)            4,522
                                                                   ----------------- ----------------- ---------------
Cash flows from investing activities:
    Net decreases in interest-bearing deposits in banks                      1,536           180,452         2,259,394
    Proceeds from sales of available for sale securities                   141,316         2,701,397         1,446,042
    Purchase of available for sale securities                             (138,200)       (1,744,684)       (1,959,829)
    Investment in subsidiary Bank                                         (495,000)         (500,000)       (1,660,261)
    Purchase of office building and equipment                                    -                 -           (36,411)
    Proceeds from sale of office building and equipment to                                                            
      subsidiary Bank                                                            -            32,933           166,977
    Proceeds from sales of other real estate                               430,778                 -                 -
    Purchase of other real estate from subsidiary Bank                           -          (512,000)                -
                                                                   ----------------- ----------------- ---------------
         Net cash provided by (used in) investing activities               (59,570)          158,098           215,912
Cash flows from financing activities -
    proceeds from stock options exercised                                    5,385                 -                 -
                                                                   ----------------- ----------------- ---------------
         Increase (decrease) in cash and due from banks                    (99,280)           90,262           220,434
                                                                   ----------------- ----------------- ---------------
Cash and due from banks:
    Beginning                                                              374,160           283,898            63,464
                                                                   ----------------- ----------------- ---------------
    Ending                                                         $       274,880   $       374,160   $      283,898
                                                                   ================= ================= ===============
Supplemental disclosures of cash flow information:
    Cash paid during the year for income taxes                     $        10,297   $        30,071   $          909
                                                                   ================= ================= ===============
Supplemental schedule of non-cash investing and financing 
    activities:
     Net change in unrealized gain (loss) on available for sale                                                       
       securities                                                  $        (1,918)  $       (46,338)  $       25,732
                                                                   ================= ================= ===============
</TABLE>


                                      -51-
<PAGE>

                                                   
Item 8.   Changes  In and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure

There have been no changes in or  disagreements  with the Company's  independent
auditors regarding  accounting and financial  disclosure required to be reported
pursuant to this Item.

Part III

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

The information required by this Item is hereby incorporated by reference to the
information  under the captions  entitled  "Election of  Directors,"  "Executive
Officers" and  "Miscellaneous  - Section 16(a)  Beneficial  Ownership  Reporting
Compliance" set forth in the Company's  definitive  Proxy Statement for its 1999
Annual Meeting of Shareholders (the "Proxy Statement").

Item 10.  Executive Compensation

The information required by this Item is hereby incorporated by reference to the
information   under  the  captions  entitled  "Board  of  Directors  -  Director
Compensation" and "Executive Compensation" set forth in the Proxy Statement.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is hereby incorporated by reference herein
to the information under the caption entitled "Principal Shareholders" set forth
in the Proxy Statement.

Item 12.  Certain Relationships and Related Transactions

The information required by this Item is hereby incorporated by reference herein
to the information under the caption entitled  "Certain  Transactions" set forth
in the Proxy Statement.

Item 13.  Exhibits and Reports on Form 8-K

(a)  Exhibits

Reference is made to the separate exhibit index contained on page E-1 hereof.

(b)  Reports on Form 8-K

No reports  on Form 8-K were  filed by the  Company  during  the  quarter  ended
December 31, 1998.

                                      -52-

<PAGE>



                                   SIGNATURES

       In accordance with Section 13 or 15(d) of the Securities  Exchange Act of
1934,  the  Registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized, on March 16, 1999.

                                  RIDGESTONE FINANCIAL SERVICES, INC.


                                  By:   /s/ Paul E. Menzel        
                                        Paul E. Menzel
                                        President and Chief Executive Officer

       In accordance  with the  requirements  of the Securities  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
the Registrant in the capacities indicated on March 16, 1999:

   Signatures                           Title
/s/ Paul E. Menzel               President, Chief Executive Officer and Director
Paul E. Menzel                   (Principal Executive Officer)

/s/ William R. Hayes             Vice President, Treasurer and Director
William R. Hayes                 (Principal Financial and Accounting Officer)

/s/ Christine V. Lake            Vice President, Secretary and Director
Christine V. Lake

/s/ Charles N. Ackley                              Director
Charles N. Ackley

/s/ Gregory J. Hoesly                              Director
Gregory J. Hoesly

                                                   Director
John E. Horning

/s/ William F. Krause, Jr.                         Director
William F. Krause, Jr.

/s/ Charles G. Niebler                             Director
Charles G. Niebler

/s/ Bernard E. Adee                                Director
Bernard E. Adee

/s/ James E. Renner                                Director
James E. Renner

/s/ Richard A. Streff                              Director
Richard A. Streff

/s/ William J. Tetzlaff                            Director
William J. Tetzlaff

                                      -53-
<PAGE>



                                INDEX TO EXHIBITS

   Exhibit No.                 Exhibit Description


        3.1     Articles of  Incorporation  of  Ridgestone  Financial  Services,
                Inc., as amended.  [Incorporated  by reference to Exhibit 4.4 to
                Ridgestone Financial Services,  Inc.'s Registration Statement on
                Form S-8 (Registration No. 333-52323)]
      
        3.2     By-Laws of  Ridgestone  Financial  Services,  Inc.,  as amended.
                [Incorporated   by  reference  to  Exhibit  4.6  to   Ridgestone
                Financial Services,  Inc.'s  Registration  Statement on Form S-8
                (Registration No. 333-52323)]

        10.1    Lease  Agreement   between  CDJLT   Investments  and  Ridgestone
                Financial   Services,   Inc.   dated  as  of  March  31,   1995.
                [Incorporated   by  reference  to  Exhibit  10.2  to  Ridgestone
                Financial Services,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-97644)]

        10.2    Consolidated  Agreement between Ridgestone  Financial  Services,
                Inc.  and  Unisys  Corporation,   dated  as  of  May  31,  1995.
                [Incorporated   by  reference  to  Exhibit  10.3  to  Ridgestone
                Financial Services,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-97644)]

        10.3    Real Estate Purchase  Contract  between J.M. and P.L. Wilson and
                Ridgestone  Financial  Services,   Inc.  dated  June  23,  1995.
                [Incorporated   by  reference  to  Exhibit  10.5  to  Ridgestone
                Financial Services,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-97644)]

        10.4    Data Processing  Service Agreement  between  Ridgestone Bank and
                United Financial  Services,  Inc. dated as of September 1, 1995.
                [Incorporated  by  reference  to  Exhibit  10.10  to  Ridgestone
                Financial Services,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-97644)]

        *10.5   Ridgestone  Financial Services,  Inc. 1996 Stock Option Plan, as
                amended. [Incorporated by reference to Exhibit 4.1 to Ridgestone
                Financial Services,  Inc.'s  Registration  Statement on Form S-8
                (Registration No. 333-52323)]

        *10.6   Form of Stock  Option  Agreement  used in  conjunction  with the
                Ridgestone  Financial Services,  Inc. 1996 Stock Option Plan, as
                amended. [Incorporated by reference to Exhibit 4.2 to Ridgestone
                Financial Services,  Inc.'s  Registration  Statement on Form S-8
                (Registration No. 333-52323)]

        *10.7   Employment  Agreement,  dated as of December 31,  1996,  between
                Ridgestone   Financial  Services,   Inc.  and  Paul  E.  Menzel.
                [Incorporated   by  reference  to  Exhibit  10.6  to  Ridgestone
                Financial Services,  Inc.'s Annual Report on Form 10-KSB for the
                fiscal year ended December 31, 1997 (File No. 0-27984)]

        *10.8   First  Amendment to Employment  Agreement,  dated as of December
                31, 1997, between Ridgestone  Financial Services,  Inc. and Paul
                E.  Menzel.  [Incorporated  by  reference  to  Exhibit  10.8  to
                Ridgestone  Financial  Services,  Inc.'s  Annual  Report on Form
                10-KSB for the fiscal  year ended  December  31,  1997 (File No.
                0-27984)]

                                      E-1
<PAGE>

                                INDEX TO EXHIBITS

   Exhibit No.                 Exhibit Description

        *10.9   Employment  Agreement,  dated as of December 31,  1996,  between
                Ridgestone  Financial  Services,  Inc.  and  William  R.  Hayes.
                [Incorporated   by  reference  to  Exhibit  10.7  to  Ridgestone
                Financial Services,  Inc.'s Annual Report on Form 10-KSB for the
                fiscal year ended December 31, 1997 (File No. 0-27984)]
   
        *10.10  First  Amendment to Employment  Agreement,  dated as of December
                31,  1997,  between  Ridgestone  Financial  Services,  Inc.  and
                William R. Hayes. [Incorporated by reference to Exhibit 10.10 to
                Ridgestone  Financial  Services,  Inc.'s  Annual  Report on Form
                10-KSB for the fiscal  year ended  December  31,  1997 (File No.
                0-27984)]

        *10.11  Employment  Agreement,  dated as of December 31,  1996,  between
                Ridgestone  Financial  Services,  Inc.  and  Christine  V. Lake.
                [Incorporated   by  reference  to  Exhibit  10.8  to  Ridgestone
                Financial Services,  Inc.'s Annual Report on Form 10-KSB for the
                fiscal year ended December 31, 1997 (File No. 0-27984)]

        *10.12  First  Amendment to Employment  Agreement,  dated as of December
                31,  1997,  between  Ridgestone  Financial  Services,  Inc.  and
                Christine V. Lake.  [Incorporated  by reference to Exhibit 10.12
                to Ridgestone  Financial Services,  Inc.'s Annual Report on Form
                10-KSB for the fiscal  year ended  December  31,  1997 (File No.
                0-27984)]

        *10.13  Salary  Continuation  Agreement,  dated October 20, 1998, by and
                between  Ridgestone  Bank and Paul E. Menzel.  [Incorporated  by
                reference  to Exhibit  10.1 to  Ridgestone  Financial  Services,
                Inc.'s  Quarterly  Report on Form 10-QSB for the  quarter  ended
                September 30, 1998 (File No. 0-27984)]

        *10.14  Split Dollar  Agreement,  dated October 20, 1998, by and between
                Ridgestone Bank and Paul E. Menzel.  [Incorporated  by reference
                to  Exhibit  10.2  to  Ridgestone  Financial  Services,   Inc.'s
                Quarterly  Report on Form 10-QSB for the quarter ended September
                30, 1998 (File No. 0-27984)]

        *10.15  Split Dollar  Agreement,  dated October 20, 1998, by and between
                Ridgestone Bank and Paul E. Menzel.  [Incorporated  by reference
                to  Exhibit  10.3  to  Ridgestone  Financial  Services,   Inc.'s
                Quarterly  Report on Form 10-QSB for the quarter ended September
                30, 1998 (File No. 0-27984)]

        *10.16  Form of Executive Incentive Retirement Agreement,  dated October
                20, 1998, by and between  Ridgestone  Bank and each of Christine
                V. Lake and  William R. Hayes.  [Incorporated  by  reference  to
                Exhibit 10.4 to Ridgestone Financial Services,  Inc.'s Quarterly
                Report on Form 10-QSB for the quarter  ended  September 30, 1998
                (File No. 0-27984)]

        *10.17  Form of Split Dollar  Agreement,  dated October 20, 1998, by and
                between  Ridgestone  Bank  and  each of  Christine  V.  Lake and
                William R. Hayes.  [Incorporated by reference to Exhibit 10.5 to
                Ridgestone  Financial Services,  Inc.'s Quarterly Report on Form
                10-QSB  for the  quarter  ended  September  30,  1998  (File No.
                0-27984)]

        21      Subsidiaries   of   Ridgestone    Financial    Services,    Inc.
                [Incorporated   by  reference  to  Exhibit  21.1  to  Ridgestone
                Financial Services,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-97644)]

                                      E-2
<PAGE>

                                INDEX TO EXHIBITS

   Exhibit No.                 Exhibit Description

        23      Independent Auditor's Consent

        27      Financial Data Schedule (EDGAR version only)


*This  exhibit is a  management  contract or  compensatory  plan or  arrangement
required to be filed as an exhibit to this Form 10-KSB pursuant to Item 13(a) of
Form 10-KSB.

                                      E-3