SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                                 --------------
(Mark One)
|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                  
                          ------------------------------------------------------

                                     - OR -

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

For the transition period from                          to                
                               ------------------------    ---------------------
SEC File Number:     0-25149   
                ---------------
                            RIDGEWOOD FINANCIAL, INC.
--------------------------------------------------------------------------------
              (Exact name of small business issuer in its charter)

 New Jersey                                                     22-3616280     
 -------------------------------                            --------------------
(State or other jurisdiction of                              (I.R.S. Employer
of incorporation or organization)                           Identification No.)

55 North Broad Street, Ridgewood, New Jersey                        07450      
--------------------------------------------                    -------------- 
   (Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:              (201) 445-4000
                                                            --------------------
Securities registered pursuant to Section 12(b) of the Act:         None        
                                                            --------------------
Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B 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 10-KSB. [X]

         State issuer's revenues for its most recent fiscal year $16,518,633.

     Issuer's  voting  stock  trades on The Nasdaq Stock Market under the symbol
"RSBI". The aggregate market value of the voting stock held by non-affiliates of
the  issuer,  based upon the  closing  price of such stock as of March 25,  1999
($8.00 per share), was $10.3 million.

     As of March 25,  1999,  registrant  had  3,180,000  shares of common  stock
outstanding.

 Transitional Small Business Disclosure Format (check one):   Yes      No   X  
                                                                 ----     -----
DOCUMENTS INCORPORATED BY REFERENCE:  None.


<PAGE>

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

     These forward-looking  statements involve risks and uncertainties,  such as
statements  of the  Company's  plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the Board of  Governors of the
Federal  Reserve  System,   inflation,   interest  rate,   market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes,  acquisitions;  changes in consumer spending
and saving habits; and the success of the Company at managing these risks.

     The Company cautions that this list of important  factors is not exclusive.
The Company does not undertake to update any forward-looking statement,  whether
written  or oral,  that may be made  from  time to time by or on  behalf  of the
Company.

                                     PART I

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

General

     The Company is a savings bank holding company that was incorporated in July
1998 under the laws of the State of New Jersey for the purpose of acquiring  all
of the issued and  outstanding  common  stock of  Ridgewood  Savings Bank of New
Jersey (the "Bank").  This acquisition  occurred in January 1999 at the time the
Bank simultaneously converted from a mutual to stock institution and sold all of
its  outstanding  capital  stock to the  Company,  the Company  made its initial
public offering of common stock and provided  additional  shares of common stock
to  Ridgewood  Financial,  MHC, a mutual  holding  company that holds 53% of the
outstanding   shares  of  the  Company  (the   "Reorganization").   Because  the
Reorganization  was not  completed  until January 7, 1999, at December 31, 1998,
the Company had no assets,  liabilities or equity. As a result,  throughout this
report all references to operations,  assets, liabilities and equity of the Bank
include those of the Company. As of December 31, 1998, the Bank had total assets
of $274.7 million,  total deposits of $205.5 million,  and total equity of $17.4
million or 6.3% of total assets. The only subsidiary of the Company is the Bank.

     The  Bank  is  a  state-chartered   stock  savings  bank  headquartered  in
Ridgewood,  New  Jersey.  The Bank was  founded in 1885 with a charter  from the
state  of New  Jersey  under  the  name  of "The  Ridgewood  Building  and  Loan
Association" which later became a New Jersey-chartered savings bank

                                        2

<PAGE>



under the name of  "Ridgewood  Savings Bank of New Jersey." The Bank's  deposits
are federally  insured by the Savings  Association  Insurance Fund ("SAIF"),  as
administered by the Federal Deposit Insurance Corporation ("FDIC").

     The  primary  activity  of  the  Company  is  directing  and  planning  the
activities of the Bank, the Company's  primary asset.  The Company engages in no
other  significant  activities.  As a  result,  references  to  the  Company  or
Registrant  generally refer to the Bank, unless the context otherwise indicates.
In the discussion of regulation,  except for the discussion of the regulation of
the Company, all regulations apply to the Bank rather than the Company.

     The Bank is  primarily  engaged in  attracting  deposits  from the  general
public and using those funds to originate  and sell real estate loans on one- to
four-family  residences and, to a lesser extent, to originate consumer loans and
other  loans for its  portfolio.  The Bank also  purchases  one- to  four-family
residential  loans.  The Bank has offices in Ridgewood  and Mahwah,  New Jersey,
which are located in its primary  market area of  northwestern  Bergen County in
the State of New Jersey.

     The  principal  sources  of funds  for the  Bank's  lending  and  investing
activities are deposits,  Federal Home Loan Bank (FHLB) advances,  the repayment
and maturity of loans and sale, maturity, and call of securities.  The principal
source  of income  is  interest  on loans  and  mortgage-backed  and  investment
securities.  The Bank's principal  expense is interest paid on deposits and FHLB
advances.

Market Area

     The Bank's  primary  market  area for loans and  deposits  is  northwestern
Bergen  County,  New Jersey and includes the  townships of  Allendale,  Franklin
Lakes, Glen Rock, Ho-Ho-Kus,  Mahwah,  Midland Park, Oakland,  Paramus,  Ramsey,
Ridgewood,  Saddle  River,  Upper Saddle  River,  Waldwick  and  Wyckoff.  These
townships  consist  primarily of single  family homes.  There are  approximately
140,000  residents and 48,000  households within the Bank's primary market area.
This market area could be characterized as affluent.

Lending Activities

     General. The Bank primarily originates one- to four-family residential real
estate loans and, to a lesser  extent,  commercial  real estate loans,  consumer
loans  and  other  loans.  Consumer  loans  consist  of  home  equity  and  home
improvement  lines of credit  and  loans,  student  loans and loans  secured  by
savings  accounts.  Commercial  real estate loans consist  primarily of mortgage
loans secured by small commercial  office/retail  space,  retail  businesses and
small and medium sized apartment buildings.

                                        3

<PAGE>



Analysis of Loan  Portfolio.  Set forth below is selected  data  relating to the
composition of the Bank's loan portfolio by type of loan on the dates indicated.

                           Analysis of Loan Portfolio
<TABLE>
<CAPTION>
                                                                         At December 31,
                                        1998               1997              1996                1995                 1994
                                   -------------     ---------------  --------------------   -------------      ----------------
                                      $       %        $          %        $       %          $          %          $        %
                                     ---     ---      ---        ---      ---      ---       ---        ---       ---       --
                                                                     (Dollars in thousands)
Type of Loans:
  First mortgage loans:
<S>                               <C>       <C>    <C>         <C>     <C>        <C>     <C>          <C>      <C>        <C>   
    1- to 4-family..............  $ 88,936   82.23% $ 86,140    80.70%  $ 90,500   82.96%  $ 88,685     91.02%   $79,757    90.96%
    Commercial and other........     8,032    7.43    10,313     9.66     10,613    9.73      3,170      3.25      2,732     3.12

  Consumer loans:
    Equity......................    10,397    9.61     9,645     9.04      7,519    6.89      5,185      5.32      4,688     5.35
    Lines of credit.............       472    0.44       134     0.13         78    0.07         78      0.08         14     0.01
    Education...................        36    0.03       160     0.15        120    0.12         84      0.09        189     0.21
    Loans to depositors,
      secured by savings........       260    0.24       350     0.32        256    0.23        235      0.24        304     0.35
    Other.......................        25    0.02        --       --         --      --         --        --         --       --
                                   -------  ------   -------   ------    -------  ------    -------    ------     ------   ------
                                   108,158  100.00%  106,742   100.00%   109,086  100.00%    97,437    100.00%    87,684   100.00%
                                   -------  ======   -------   ======    -------  ======    -------    ======     ------   ======

Less:
  Net deferred loan fees........       315               409                 521                638                  750
  Allowance for loan losses.....       822               618                 606                593                  528
                                   -------           -------             -------            -------               ------
Total loans receivable, net.....  $107,021          $105,715            $107,959           $ 96,206              $86,406
                                   =======           =======             =======            =======               ======
Loans held for sale.............  $     --          $    750            $  3,756           $    199              $   504
                                   =======           =======             =======            =======               ======
</TABLE>





                                        4

<PAGE>



     Loan  Maturity.  The following  table sets forth the maturity of the Bank's
loan portfolio at December 31, 1998.  The table does not include  prepayments or
scheduled principal  repayments.  Prepayments and scheduled principal repayments
on loans  totalled $27.6 million for the year ended December 31, 1998. All loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
                          1-4 Family                                Consumer                Consumer
                            First         Commercial     Consumer   Lines of   Consumer    Secured by
                          Mortgage         and Other      Equity     Credit    Education    Deposits        Other       Total
                        -----------     ------------   ---------- ----------  ----------  ------------    ---------    --------

                                                    (In Thousands)
<S>                      <C>           <C>             <C>        <C>        <C>          <C>             <C>         <C>     
Amounts Due:
Within 1 year..........   $ 2,840       $ 1,289         $    32    $   472    $    --      $   202         $    --     $  4,835
  Over 1 to 3 years....     3,611         2,651             167         --         --           58              25        6,512
  Over 3 to 5 years....     3,279            53             872         --         36           --              --        4,240
  Over 5 to 10 years...    19,380         3,617           2,198         --         --           --              --       25,195
  Over 10 to 20
     years.............    19,491           213           7,128         --         --           --              --       26,832
  Over 20 years........    40,335           209              --         --         --           --              --       40,544
                           ------        ------          ------     ------     ------       ------          ------      -------
Total amount due.......   $88,936       $ 8,032         $10,397    $   472    $    36      $   260         $    25     $108,158
                           ======        ======          ======     ======     ======       ======          ======      =======

Less:
Allowance for loan                                
   losses..............                                                                                                     822
Net deferred loan
   fees................                                                                                                     315
                                                                                                                        -------
  Loans receivable,                                                                                                   
   net.................                                                                                                $107,021
                                                                                                                        =======
</TABLE>



         The following table sets forth the dollar amount of all loans due after
December  31,  1999,  which  have  predetermined  interest  rates and which have
floating or adjustable interest rates.

                                                      Floating or
                                      Fixed Rates  Adjustable Rates   Total
                                      -----------  ----------------   -----
                                                    (In Thousands)

First mortgage- 1 to 4 family            $49,205       $36,891     $ 86,096
   Commercial and other............        6,534           209        6,743
Consumer-equity....................        5,838         4,527       10,365
Consumer - lines of credit.........           --            --           --
Consumer - education...............           36            --           36
Consumer - loans to                      
   depositors secured by                 
   savings.........................           58            --           58
Other..............................           25            --           25
                                          ------        ------      -------
  Total............................      $61,696       $41,627     $103,323
                                          ======        ======      =======
                                      


     One- to Four-Family  Lending.  The Bank's primary lending activity consists
of the origination of one- to four-family  residential mortgage loans secured by
property  located in the Bank's market area. The Bank generally  originates one-
to four-family  residential mortgage loans in amounts up to 80% of the lesser of
the appraised value or selling price of the mortgaged property without requiring
mortgage  insurance.  The Bank will originate a mortgage loan in an amount up to
90% of the  lesser  of the  appraised  value or  selling  price  of a  mortgaged
property, however, mortgage insurance for the borrower

                                        5

<PAGE>



is required. The Bank generally originates and retains fixed rate and adjustable
rate loans for retention in its  portfolio.  A mortgage  loan  originated by the
Bank,  whether fixed rate or adjustable rate, can have a term of up to 30 years.
The Bank also  originates  one- to four-family  conforming  fixed rate loans for
terms of 20 and 30 years  primarily for sale in the secondary  mortgage  market.
These  loans  are sold  without  recourse  to the Bank by the buyer and the Bank
receives a servicing fee.  Servicing fee income has been  immaterial  during the
past five years. All other mortgage products are generally held in portfolio and
are  serviced  by the Bank.  The Bank  offers  fixed  rate  loans with a 15 year
amortization  period and a variety of adjustable rate loans. The adjustable rate
loans typically have a 15 to 30 year amortization period.

     The Bank's  one- to  four-family  residential  loans  (both  fixed rate and
adjustable rate) are generally  underwritten in accordance with Federal National
Mortgage  Association  ("FNMA")  guidelines,  regardless of whether they will be
sold in the secondary  market.  However,  the Bank originates some  shorter-term
loans  and  adjustable   rate,  large  dollar  amount  loans  that  exceed  FNMA
guidelines.  At December  31, 1998 the Bank had 74 of these loans that  totalled
$23.2  million or 26.1% of our $88.9  million  portfolio of one- to  four-family
first mortgage loans.  While these  relatively  higher  aggregate  dollar amount
loans are  generally  made on the same terms and  conditions as the Bank's lower
aggregate dollar amount mortgage loans,  the relatively  larger dollar amount of
possible  loss on each loan makes these loans riskier than the Bank's other home
mortgage loans.

     Substantially all of the Bank's residential mortgages include "due on sale"
clauses,  which  are  provisions  giving  the Bank the  right to  declare a loan
immediately  payable if the borrower sells or otherwise transfers an interest in
the property to a third party.

     Commercial Real Estate and Other Loans. The Bank originates commercial real
estate mortgage loans and, to a much lesser extent,  commercial  business loans.
The Bank's  commercial real estate mortgage loans are permanent loans secured by
improved  property  such as  office  buildings,  retail  stores,  and  apartment
buildings.  Essentially  all originated  commercial real estate loans are within
the  Bank's  market  area and all are  within  the  State of New  Jersey.  As of
December  31, 1998,  the Bank had 18 loans  secured by  commercial  real estate,
totalling  $8.0 million,  or 7.43% of the Bank's total loan  portfolio,  with an
average principal balance of $446,000.  The largest  commercial real estate loan
had a balance  of $2.3  million  on  December  31,  1998 and was  performing  in
accordance with its contractual terms.  Typically,  commercial real estate loans
are  originated  in amounts up to 70% of the  appraised  value of the  mortgaged
property.

     The Bank  maintains a small  number of  commercial  lines of credit made to
local businesses and professionals.  At December 31, 1998, $472,000, or 0.4%, of
the Bank's total loan portfolio consisted of commercial lines of credit. Many of
these lines of credit are also secured by real property.  Commercial real estate
and business  loans  generally are deemed to entail  significantly  greater risk
than that  which is  involved  with  single  family  real  estate  lending.  The
repayment  of  commercial   loans  typically  is  dependent  on  the  successful
operations  and income  stream of the  commercial  real estate and the borrower.
Such risks can be significantly  affected by economic  conditions.  In addition,
commercial  lending generally requires  substantially  greater oversight efforts
compared to residential real estate lending.

     Consumer Loans.  The Bank's consumer loan portfolio  consists  primarily of
home equity and home improvement  loans. To a lesser extent, the Bank originates
lines of credit,  student  loans,  loans  secured by savings  accounts and other
consumer  loans.  Consumer  loans are  originated  in the Bank's market area and
generally have  maturities of up to 15 years.  As of December 31, 1998, the Bank
had 89  overdraft  accounts  with an  available  line of  $256,000.  For savings
account loans, the Bank will lend

                                        6

<PAGE>

up to 90% of the account  balance.  Student  loans are  originated  and serviced
through the Student Loan Marketing  Association (Sallie Mae), affording the Bank
the  ability to offer all of the student  loan  programs  available  to students
without the burden of servicing them.

     Consumer loans have a shorter term and generally  provide  higher  interest
rates  than  residential  loans.  The  consumer  loan  market  can be helpful in
improving  the spread  between  average loan yield and costs of funds and at the
same time improve the  matching of the rate  sensitive  assets and  liabilities.
Management  is  considering   adding  new  consumer  loan  products,   including
automobile loans and additional personal loan options.

     Consumer  loans entail  greater risks than one-to  four-family  residential
mortgage  loans,  particularly  consumer  loans  secured by rapidly  depreciable
assets such as  automobiles  or loans that are  unsecured.  In such  cases,  any
repossessed  collateral for a defaulted loan may not provide an adequate  source
of  repayment  of  the  outstanding  loan  balance,  since  there  is a  greater
likelihood  of  damage,  loss  or  depreciation  of the  underlying  collateral.
Further,  consumer loan  collections are dependent on the borrower's  continuing
financial  stability,  and therefore are more likely to be adversely affected by
job loss,  divorce,  illness or personal  bankruptcy.  Even for  consumer  loans
secured by real estate (most of the Bank's  consumer loan portfolio) the risk to
the Bank is greater than that inherent in the  single-family  loan  portfolio in
that the  security for  consumer  loans is  generally  not the first lien on the
property and ultimate  collection of amounts due may be dependent on whether any
value remains after collection by a holder with a higher priority than the Bank.
Finally,  the application of various Federal and state laws,  including  Federal
and state  bankruptcy  and  insolvency  laws,  may limit the amount which can be
recovered on such loans in the event of a default.

     Loans to One  Borrower.  Under New Jersey and federal  law,  savings  banks
have, subject to certain exemptions, lending limits to one borrower in an amount
equal to 15% of the institution's  capital accounts. As of December 31, 1998 the
Bank's largest aggregation of loans to one borrower was $2.7 million, consisting
of loans secured by commercial real estate,  in the Ridgewood,  New Jersey area,
which was within the Bank's legal  lending limit to one borrower of $2.8 million
at such date. At December 31, 1998, the loans were current.

     Loan  Purchases  and  Sales.  The Bank  sells  most  conforming  fixed rate
mortgage  loans it  originates  for 30 year and 20 year  terms in the  secondary
mortgage  market to FNMA. The Bank  originates  student loans through Sallie Mae
and currently  sells these loans prior to repayment.  The Bank has not purchased
loans in the secondary market but may consider doing so in the future.

     Loan Commitments.  The Bank generally grants  commitments to fund fixed and
adjustable-rate  single-family  mortgage  loans  for  periods  of 60  days  at a
specified term and interest rate. The total amount of the Bank's  commitments to
extend  credit as of December 31, 1998,  1997 and 1996 was $10.4  million,  $2.2
million and $937,000, respectively.

     Loan  Origination  and Other Fees. In addition to interest earned on loans,
the Bank  receives loan  origination  and  commitment  fees for  originating  or
purchasing  loans.  Loan origination fees net of certain loan origination  costs
are deferred and amortized over the related life of the loan.

     The Bank also receives other fees and charges  relating to existing  loans,
which include prepayment  penalties on commercial loans, late charges,  and fees
collected in connection  with a change in borrower or other loan  modifications.
These fees and charges have not constituted a material source of income.


                                        7

<PAGE>



Non-performing Loans and Problem Assets

     Loans  are  reviewed  on a  regular  basis  and are  generally  placed on a
non-accrual  status  when  they are more than 90 days  delinquent.  Loans may be
placed on a non-accrual status at any time if, in the opinion of management, the
collection of additional  interest is doubtful.  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
ultimate collectibility of the loan. At December 31, 1998, the Bank had $695,000
of loans that were held on a non-accrual basis and held no real estate owned.

     The Bank has defined the  population of impaired loans to be all nonaccrual
and restructured  commercial loans and certain other performing loans considered
to be impaired as to principal and  interest.  Impaired  loans are  individually
assessed to  determine  that the loan's  carrying  value is not in excess of the
fair value of the collateral or the present value of the loan's  expected future
cash flows.  Smaller balance  homogeneous loans that are collectively  evaluated
for impairment,  such as residential  mortgage loans and installment  loans, are
excluded from the impaired loan  portfolio.  At December 31, 1998 and 1997,  the
Bank had no impaired loans.


                                        8

<PAGE>




     Non-performing  Assets.  The following  table sets forth  information  with
respect to non-performing  assets for the periods indicated.  During the periods
indicated there were no restructured loans.

<TABLE>
<CAPTION>
                                                                                     At December 31,
                                                            1998            1997         1996         1995         1994
                                                           --------       --------      -------      ------      -------
                                                                                (Dollars in thousands)
Loans accounted for on a non-accrual basis:
  First mortgage loans:
<S>                                                     <C>            <C>               <C>       <C>            <C> 
    1- to 4-family....................................    $     695      $      --        $ 313       $ 397        $ 650
    Commercial and other..............................           --             --           --          --           --
  Consumer loans:
    Equity............................................           --             --           --          --           58
    Lines of credit...................................           --             --           --          --           --
    Education.........................................           --             --           --           3            8
    Loans to depositors,
      secured by savings..............................           --             --           --          --           --
                                                           --------       --------         ----        ----         ----
  Total...............................................    $     695      $      --        $ 313       $ 400        $ 716
                                                           ========       ========         ====        ====         ====
Real estate owned.....................................    $      --      $      --        $  --       $  --        $  --
                                                           ========       ========         ====        ====         ====
Total non-performing assets...........................    $     695      $      --        $ 313       $ 400        $ 716
                                                           ========       ========         ====        ====         ====
Total non-accrual loans to net loans..................         0.65%            --%        0.28%       0.41%        0.82%
                                                           ========       ========         ====        ====         ====
Total non-accrual loans to total assets...............         0.25%            --%        0.14%       0.22%        0.50%
                                                           ========       ========         ====        ====         ====
Total non-performing assets to total assets...........         0.25%            --%        0.14%       0.22%        0.50%
                                                           ========       ========         ====        ====         ====

</TABLE>




                                        9

<PAGE>



     For the  years  ended  December  31,  1998,  1997 and  1996,  approximately
$17,000,  $0 and $13,000,  respectively  of interest would have been recorded on
loans  accounted  for on a  non-accrual  basis if such  loans  had been  current
according to the original loan  agreements for the entire period.  These amounts
were not included in the Bank's interest income for the respective periods.  The
amount of interest income on loans accounted for on a non-accrual basis that was
included in income  during the same periods was  insignificant  during the years
ended December 31, 1998, 1997 and 1996, respectively.  At December 31, 1998, the
Bank had no loans classified as troubled debt restructuring.

     Classified Assets.  Management,  in compliance with regulatory  guidelines,
has instituted an internal loan review program,  whereby loans are classified as
special  mention,  substandard,  doubtful or loss.  When a loan is classified as
substandard or doubtful, management is required to establish a valuation reserve
for loan losses in an amount that is deemed prudent.  When management classifies
a loan as a loss asset,  a reserve equal to 100% of the loan balance is required
to be  established  or the loan is to be  charged-off.  This  allowance for loan
losses is  composed of an  allowance  for both  inherent  risk  associated  with
lending activities and particular problem assets.

     An asset is considered  substandard if it is inadequately  protected by the
paying capacity and net worth of the obligor or the collateral  pledged, if any.
Substandard assets include those characterized by the distinct  possibility that
the Bank will sustain some loss if the  deficiencies  are not corrected.  Assets
classified as doubtful have all of the weaknesses  inherent in those  classified
substandard,  with the added  characteristic  that the  weaknesses  present make
collection or liquidation in full,  highly  questionable and improbable,  on the
basis of currently existing facts, conditions,  and values. Assets classified as
loss are those  considered  uncollectible  and of such  little  value that their
continuance  as  assets  without  the  establishment  of a loss  reserve  is not
warranted.  Assets which do not currently  expose the insured  institution  to a
sufficient degree of risk to warrant classification in one of the aforementioned
categories but possess credit deficiencies or potential  weaknesses are required
to be designated  special  mention by  management.  In addition,  each loan that
exceeds  $500,000 and each group of loans to one borrower that exceeds  $500,000
is monitored more closely due to the potentially greater losses from such loans.

     Management's evaluation of the classification of assets and the adequacy of
the reserve  for loan losses is reviewed by the Board on a regular  basis and by
the regulatory agencies as part of their examination process.

Internal Classification of Assets
                                                        At
                                                   December 31,
                                                       1998
                                                  (In thousands)

Special mention.............................        $   387
Substandard.................................            716
Doubtful ...................................             --
Loss .......................................             --
                                                     ------

     Total..................................         $1,103
                                                      =====





                                       10

<PAGE>



     Allowance  for  Loan  Losses  and  REO.  At  least  quarterly,  the  Bank's
management  evaluates the need to establish reserves against losses on loans and
other assets based on estimated  losses on specific loans and on any real estate
held for sale or investment  when a finding is made that a loss is estimable and
probable.  Such  evaluation  includes  a review  of all  loans  for  which  full
collectibility may not be reasonably assured and considers, among other matters,
the estimated market value of the underlying  collateral of problem loans, prior
loss  experience,  economic  conditions  and  overall  portfolio  quality.  Also
considered are trends in the loan portfolio,  expected  future loss  experience,
and industry reserve levels.  Provisions for losses are charged against earnings
in the period they are established.



                                       11

<PAGE>



     The following table sets forth certain information  regarding the allowance
for loan losses at or for the dates indicated.

<TABLE>
<CAPTION>
                                                                          At or for years ended December 31,
                                                             1998        1997         1996          1995         1994
                                                          ----------   ---------    ---------      --------     --------
                                                                              (Dollars in thousands)

<S>                                                      <C>           <C>          <C>            <C>          <C>    
Balance at beginning of period........................    $    618      $    606     $    593       $   528      $   464
Provision for loan losses.............................         204            12           12            60           60
Charge-offs...........................................          --            --           (2)            --          --
Recoveries............................................          --            --            3             5            4
                                                           -------       -------      -------        ------       ------
Balance at end of period..............................    $    822      $    618     $    606       $   593      $   528
                                                           =======       =======      =======        ======       ======

Total loans receivable(1).............................    $107,021      $106,465     $111,715       $96,405      $86,910
                                                           =======       =======      =======        ======       ======
Average loans outstanding(1)..........................    $105,411      $109,954     $105,170       $94,040      $87,369
                                                           =======       =======      =======        ======       ======
Allowance for loan losses as a
  percent of total loans..............................        0.77%         0.58%        0.54%         0.62%        0.61%
                                                           =======       =======      =======        ======       ======
Net loans charged off as a
  percent of average loans outstanding................          --%           --%          --%           --%          --%
                                                           =======       =======      =======        ======       ======
</TABLE>

---------------------------------
(1) includes loans held for sale




                                       12

<PAGE>



         The  following  table  exhibits a  breakdown  by loan  category  of the
allowance for loan losses.
<TABLE>
<CAPTION>
                                                                           At December 31,
                              ------------------------------------------------------------------------------------------------------
                                     1998                  1997                 1996                  1995               1994
                              --------------------  --------------------  ---------------------  --------------- ------------------
                                       Percent of           Percent of          Percent of          Percent of          Percent of
                                        Loans                 Loans               Loans               Loans               Loans
                                        in Each              in Each             in Each             in Each             in Each
                                      Category to          Category to          Category to         Category to         Category to
                              Amount  Total Loans  Amount  Total Loans  Amount  Total Loans  Amount Total Loans  Amount Total Loans
                              ------  -----------  ------  -----------  ------  -----------  ------ -----------  ------ -----------
                                                                        (Dollars in thousands)

First mortgage -
<S>                            <C>        <C>       <C>      <C>       <C>      <C>        <C>       <C>         <C>    <C>   
  1- to 4-family.............   $679       82.60%    $499     80.70%     $512     82.96%     $542      91.02%     $478     90.96%
  Commercial and other.......     60        7.30       60      9.66        54      9.73        18       3.25        15      3.12
Consumer - equity............     77        9.37       56      9.04        38      6.89        30       5.32        32      5.35
Consumer - lines of credit...      4        0.49        1      0.13        --      0.07        --       0.08        --      0.01
Consumer - education.........     --          --        1      0.15         1      0.12         2       0.09         1      0.21
Consumer - loans                                                                           
  to depositors,                                                                           
  secured by savings.........      2        0.24        1      0.32         1      0.23         1       0.24         2      0.35
                                ----        ----     ----      ----      ----      ----      ----       ----      ----      ----
     Total allowance                                                                       
       for loan losses.......   $822      100.00%    $618    100.00%     $606    100.00%     $593     100.00%     $528    100.00%
                                 ===      ======      ===    ======       ===    ======       ===     ======       ===    ======
</TABLE>                                                         



                                       13

<PAGE>




Investment Activities

     General. New Jersey-chartered savings banks have the authority to invest in
various types of liquid assets,  including  United States Treasury  obligations,
securities of various  Federal  agencies,  certain  certificates  of deposits of
insured banks and savings  institutions,  municipal  securities,  corporate debt
securities and loans to other banking institutions.

     The Bank  maintains  liquid  assets  which  may be  invested  in  specified
short-term  securities and certain other  investments.  Liquidity  levels may be
increased or decreased depending upon the yields on investment  alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other  opportunities  and its expectation of future yield levels,
as well as management's  projections as to the short-term demand for funds to be
used in the Bank's loan origination and other activities.  The Bank maintains an
investment  securities  portfolio and a mortgage-backed  securities portfolio as
part of its investment portfolio.

     Investment   Policies.   The  investment  policy  of  the  Bank,  which  is
established  by the Board of  Directors,  is  designed  to foster  earnings  and
liquidity within prudent interest rate risk guidelines,  while complementing the
Bank's lending  activities.  The policy provides for available for sale, held to
maturity, and trading classifications.  However, the Bank does not currently use
a trading  classification  and does not anticipate  doing so in the future.  The
policy permits  investments in high credit quality  instruments with diversified
cash  flows  while  permitting  the Bank to  maximize  total  return  within the
guidelines  set forth in the  Bank's  interest  rate risk,  funds and  liquidity
management policy.  Permitted  investments  include but are not limited to U. S.
government  obligations,   government  agency  or  government-sponsored   agency
obligations, state, county and municipal obligations, mortgage backed securities
and   collateralized   mortgage   obligations   guaranteed   by   government  or
government-sponsored  agencies,  investment grade corporate debt securities, and
commercial  paper. The Bank also invests in Federal Home Loan Bank overnight and
term deposits,  certificates of deposit of insured banks, and federal funds, but
these instruments are not considered part of the investment portfolio.

     Investment  Securities.  The  Bank  maintains  a  portfolio  of  investment
securities  held to maturity.  The Bank also maintains a portfolio of investment
securities available for sale to enhance total return on investments. Investment
securities  available for sale are accounted at fair market value.  For the year
ended  December  31,  1998 the Bank sold  $10.5  million  of  securities.  As of
December 31, 1998, the market value of investment  securities available for sale
was $16.9 million, with a cost basis of $16.7 million.

     Mortgage-backed  Securities. The Bank invests in mortgage-backed securities
to provide earnings,  liquidity,  cash flows, and  diversification to the Bank's
overall balance sheet. These mortgage-backed securities are classified as either
available  for sale or held to  maturity.  These  securities  are  participation
certificates   issued  and  guaranteed  by  the  Government   National  Mortgage
Association  ("GNMA") the Federal National Mortgage Association ("FNMA") and the
Federal  Home Loan  Mortgage  Association  ("FHLMC")  and secured by interest in
pools  of   mortgages.   Mortgage-backed   securities   typically   represent  a
participation  interest in a pool of  single-family  or multi-family  mortgages,
although the Bank focuses its investments on mortgage-backed  securities secured
by single-family mortgages.

     The Bank also  invests  in  mortgage-related  securities,  primarily  CMOs,
issued or sponsored by GNMA, FNMA, FHLMC, as well as private issuers. CMOs are a
type of debt security  that  aggregates  pools of mortgages and  mortgage-backed
securities  and  creates  different  classes  of  CMO  securities  with  varying
maturities and amortization  schedules as well as a residual  interest with each
class having

                                       14

<PAGE>



different risk  characteristics.  The cash flows from the underlying  collateral
are usually divided into "tranches" or classes whereby  tranches have descending
priorities with respect to the distribution of principal and interest  repayment
of the underlying  mortgages and mortgage  backed  securities as opposed to pass
through mortgage backed  securities where cash flows are distributed pro rata to
all security holders. Unlike mortgage  backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders,  cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in  accordance  with a  predetermined  priority  to  investors  holding  various
tranches of such  securities or obligations.  A particular  tranche or class may
carry  prepayment  risk  which  may be  different  from  that of the  underlying
collateral  and other  tranches.  CMOs  attempt to  moderate  reinvestment  risk
associated  with   conventional   mortgage-backed   securities   resulting  from
unexpected  prepayment activity.  Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.

     Other Securities. Other securities used by the Company, but not necessarily
included   in  the   investment   portfolio,   consist  of  equity   securities,
interest-bearing  deposits  and federal  funds  sold.  Equity  securities  owned
consist of 400 shares of Federal  National  Mortgage  Association  common  stock
(included in the investment  securities  portfolio) and 19,486 shares of Federal
Home Loan Bank of New York  (FHLB NY) common  stock.  The  remaining  securities
provide diversification and complement the Bank's overall investment strategy.

Investment Portfolio

     The  following  table  sets  forth  the  carrying  value of the  investment
securities  portfolio,  and  mortgage-backed  securities  portfolio at the dates
indicated.  At December 31, 1998,  the fair value of the  investment  securities
portfolio and mortgage-backed  securities portfolio were $18.3 million and $99.8
million, respectively.
<TABLE>
<CAPTION>
                                                                    At December 31,
                                                          -------------------------------
                                                             1998        1997        1996
                                                          --------    --------     ------
                                                                   (In thousands)
<S>                                                        <C>         <C>        <C>   
Investment Securities Held to Maturity:                                              
 U.S. Government Securities..............................  $    --     $ 1,771     $ 2,328
 U.S. agencies...........................................    1,354       7,895      10,393
                                                           -------      ------      ------
   Total Investment Securities Held to Maturity..........    1,354       9,666      12,721
Investment Securities Available for Sale:
  U.S. Government Securities.............................       --         498         493
  U.S. Agency Securities...............................      1,468      23,193      40,103
  Municipal Securities...................................   13,901       3,241       2,599
  Corporate Bonds........................................    1,522          --          --
  Equity Securities(1)...................................       30          22          16
                                                           -------   ---------   ---------
    Total Investment Securities Available For            
    Sale.................................................   16,921      26,954      43,211
Mortgage-backed Securities Held to Maturity..............   11,277      14,356      16,611
Mortgage-backed Securities Available For Sale............   88,390      50,099      19,359
                                                            ------      ------      ------
   Total Investment and Mortgage-backed
   Securities............................................ $117,942    $101,075     $91,902
                                                           =======     =======      ======
</TABLE>

--------------
(1)  Equity  securities  consist  of 400  shares of  Federal  National  Mortgage
     Association common stock (requirement of being a Seller-Servicer).

                                       15

<PAGE>



     Investment  Portfolio  Maturities.  The following  table sets forth certain
information   regarding  the  carrying  values,   weighted  average  yields  and
maturities of the Bank's investment and mortgage-backed  securities portfolio at
December 31, 1998.
<TABLE>
<CAPTION>
                           One Year or Less  One to Five Years   Five to Ten Years  More than Ten Years Total Investment Securities
                           ----------------  -----------------   -----------------  ------------------- ---------------------------
                           Carrying Average   Carrying   Average   Carrying  Average  Carrying   Average  Carrying Average  Market
                            Value    Yield     Value      Yield     Value     Yield     Value     Yield     Value   Yield    Value
                           -------  -------   -------    -------   -------   -------   -------   -------   ------- -------  ------
                                                               (Dollars in Thousands)
<S>                         <C>      <C>       <C>        <C>      <C>       <C>     <C>       <C>     <C>        <C>    <C>     
Investment Securities:
  U. S. Agency Securities..   $ 58     9.38%    $   43      9.38%   $   659    9.73%  $ 2,062    6.64%   $ 2,822    7.46%  $  2,842
  Corporate Bonds..........     --       --      1,522      6.00         --      --        --      --      1,522    6.00      1,522
  Municipal Securities.....     --       --      1,721      3.78        721    4.73    11,459    4.94     13,901    4.79     13,901
  Equity Securities(1).....     30     4.67         --        --         --      --        --      --         30    4.67         30
                              ----     ----      -----      ----     ------    ----    ------    ----    -------    ----    -------
    Total Investment                                                                                                        
      Securities...........     88     7.77      3,286      4.88      1,380    7.12    13,521    5.20     18,275    5.30     18,295
Mortgage-backed Securities.    708     7.00      3,900      6.98     19,887    7.62    75,172    8.14     99,667    7.99     99,799
                               ---     ----      -----      ----     ------    ----    ------    ----     ------    ----    -------
    Total Investments......   $796     7.12%    $7,186      6.02%   $21,267    7.59%  $88,693    7.69%  $117,942    7.57%  $118,094
                               ===     ====      =====      ====     ======    ====    ======    ====    =======    ====    =======
</TABLE>                                                               

------------------------                                  
(1)  Equity  securities  consist  of 400  shares of  Federal  National  Mortgage
     Association common stock (requirement of being a Seller-Servicer).


                                       16

<PAGE>



Sources of Funds

     General.  Deposits are the major source of the Bank's funds for lending and
other  investment  purposes.  Borrowings  may be used on a  short-term  basis to
compensate for reductions in the  availability  of funds from other sources.  In
addition  to  deposits  and  borrowings,  the Bank  derives  funds from loan and
mortgage-backed  securities principal repayments,  and proceeds from the sale of
mortgage-backed  securities and investment securities.  Loan and mortgage-backed
securities  payments  are a relatively  stable  source of funds,  while  deposit
inflows are significantly  influenced by general interest rates and money market
conditions.  They also may be used on a longer-term basis for interest rate risk
management and general business purposes.

     Deposits.  The Bank  offers a  variety  of  deposit  accounts,  although  a
majority  of  deposits  are in  fixed-term,  market-rate  certificate  accounts.
Deposit account terms vary, primarily as to the required minimum balance amount,
the amount of time that the funds  must  remain on  deposit  and the  applicable
interest rate.

Jumbo Certificates of Deposit

     The following table shows the amount of the Bank's  certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 1998.

                                                Certificates
Maturity Period                                   of Deposit
---------------                                   ----------
                                              (In thousands)
Within three months.....................          $ 4,963
Three through six months................            5,909
Six through twelve months...............            4,573
Over twelve months......................            1,955
                                                   ------
                                                  $17,400



     Borrowings. Deposits are the primary source of funds for the Bank's lending
and investment  activities and for its general business  purposes.  The Bank, as
the need arises,  relies upon advances from the FHLB NY to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB NY are  typically  secured by the Bank's stock in the FHLB and a portion of
the  Bank's  residential  mortgage  loans  and may be  secured  by other  assets
(principally  securities  which are  obligations  of or  guaranteed  by the U.S.
Government).  The Bank funds loan  demand and  investment  opportunities  out of
current loan and mortgage-backed  securities  repayments,  investment maturities
and new  deposits.  However,  the Bank has utilized  FHLB advances to supplement
these  sources and as a match against  certain  assets in order to better manage
interest rate risk.


                                       17

<PAGE>



     The following table sets forth information  concerning FHLB advances during
the periods indicated (includes both short- and long-term advances).

                                                    At or For the Years
                                                     Ended December 31,
                                            --------------------------------
                                             1998         1997         1996

FHLB advances:
Average balance outstanding.............    $23,596      $22,012      $32,210
Maximum amount outstanding
    at any month-end during
    the period..........................     32,895       28,400       38,972
Balance outstanding at
  end of period.........................     32,557       16,282       28,400
Weighted average interest
    rate during the period..............       5.66%        5.93%        5.81%
Weighted average
    interest rate at
    the end of the period...............       5.41%        6.00%        5.86%



Subsidiary Activity

     The Bank is  permitted  to invest  its assets in the  capital  stock of, or
originate secured or unsecured loans to, subsidiary corporations.  The Bank does
not have any subsidiaries.

Personnel

     As of  December  31,  1998,  the Bank  had 31  full-time  employees  and 11
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  unit.  The Bank believes its  relationship  with its employees to be
satisfactory.

Competition

     The Bank faces strong competition in its attraction of deposits,  which are
its primary source of funds for lending,  and in the  origination of real estate
and consumer loans. The Bank's  competition for deposits and loans  historically
has come from other savings  institutions  and  commercial  banks located in the
Bank's market area. The Bank also competes with mortgage  banking  companies for
real estate loans,  and commercial  banks and savings  institutions for consumer
loans;  and faces  competition for investor funds from  short-term  money market
securities  and corporate and government  securities.  The Bank's primary market
area is northwestern Bergen County, New Jersey.

Regulation of the Bank

     General.  As a New Jersey  chartered  savings  bank  insured by the Savings
Association  Insurance  Fund (the  "SAIF"),  the Bank is  subject  to  extensive
regulation and examination by the New Jersey Department of Banking and Insurance
(the  "Department"),  the FDIC, which insures its deposits to the maximum extent
permitted  by law,  and to a much lesser  extent,  by the Federal  Reserve.  The
federal and state laws and  regulations  which are applicable to banks regulate,
among other things, the scope of their business, their investments, the reserves
required to be kept against deposits, the timing of the availability

                                       18

<PAGE>



of  deposited  funds and the  nature and amount of and  collateral  for  certain
loans.  The  laws  and  regulations  governing  the  Bank  generally  have  been
promulgated  to  protect  depositors  and  not  for the  purpose  of  protecting
stockholders.  The regulatory  structure  also gives the regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of assets and the  establishment  of adequate loan loss reserves
for regulatory  purposes.  Any change in regulation,  whether by the Department,
the FDIC or the United States  Congress could have a material  adverse impact on
the Company, the Bank and their operations.

     New Jersey  Savings Bank Law. The New Jersey  Banking Act of 1948 ("Banking
Code") contains  detailed  provisions  governing the  organization,  location of
offices,  rights and responsibilities of directors,  officers, and employees, as
well as corporate powers, savings and investment operations and other aspects of
the Bank and its affairs. The Banking Code delegates extensive rule-making power
and  administrative  discretion to the  Department so that the  supervision  and
regulation  of  state  chartered  savings  banks  may be  flexible  and  readily
responsive  to  changes  in  economic  conditions  and in  savings  and  lending
practices.

     One of the  purposes of the Banking Code is to provide  savings  banks with
the opportunity to be fully competitive with each other and with other financial
institutions  existing under other state, federal and foreign laws. To this end,
the Banking Code provides  state-chartered  savings banks with all of the powers
enjoyed by federal savings and loan  associations,  subject to regulation by the
Department.   Federal  law,   however,   generally   prohibits  state  chartered
institutions  from  making new  investments,  loans,  or  becoming  involved  in
activities  as principal  and equity  investments  which are not  permitted  for
national banks. The ability of the Banking Code to provide additional  operating
authority to the Bank is limited by federal law.

     Insurance of Deposit  Accounts.  The deposit  accounts held by the Bank are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's primary regulator.

     As a member of the SAIF,  the Bank paid an  insurance  premium  to the FDIC
equal to a minimum  of 0.23% of its  total  deposits.  The FDIC  also  maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial  bank deposits.  In 1996, the annual  insurance  premium for most BIF
members  was lowered to $2,000.  The lower  insurance  premiums  for BIF members
placed SAIF members at a competitive disadvantage to BIF members.

     Effective September 30, 1996, federal law was revised to mandate a one-time
special  assessment on SAIF members such as the Bank of approximately  0.657% of
deposits  held on March  31,  1995.  Beginning  January  1,  1997,  the  deposit
insurance  assessment for most SAIF members was reduced to 0.064% of deposits on
an annual basis  through the end of 1999.  During this same period,  BIF members
will be assessed  approximately 0.013% of deposits.  After 1999, assessments for
BIF and SAIF members  should be the same. It is expected  that these  continuing
assessments  for both  SAIF and BIF  members  will be used to repay  outstanding
Financing Corporation bond obligations.  As a result of these changes, beginning
January 1, 1997,  the rate of deposit  insurance  assessed the Bank  declined by
approximately 70%.


                                       19

<PAGE>



     Regulatory  Capital  Requirements.  Under  FDIC  regulations,  the  Bank is
required  to  maintain  minimum  leverage  capital (a ratio of Tier 1 capital to
total risk-weighted assets) of 4%. For institutions other than those most highly
rated by the FDIC,  additional  capital  of at least 100 to 200 basis  points is
required.   Tier  1  capital  is  the  sum  of  common   stockholders'   equity,
noncumulative  perpetual  preferred  stock  (including any related  surplus) and
minority  investments in certain  subsidiaries,  less certain intangible assets,
deferred  tax  assets,  certain  identified  losses and certain  investments  in
securities  subsidiaries.  As a SAIF-insured,  state-chartered savings bank, the
Bank must  currently  also  deduct  from Tier 1 capital  an amount  equal to its
investments  in, and  extensions of credit to,  subsidiaries  engaged in certain
activities not permissible for national banks.

     In  addition  to the  leverage  ratio,  the Bank must  maintain  a ratio of
qualifying  total capital to risk- weighted assets of at least 8.0%, of which at
least four percentage  points must be Tier 1 capital.  Qualifying  total capital
consists  of Tier 1 capital  plus Tier 2 or  supplementary  capital  items which
include  allowances for loan losses in an amount of up to 1.25% of risk-weighted
assets,  cumulative  preferred stock and preferred stock with a maturity of over
20 years and certain other capital instruments.  The includable amount of Tier 2
capital cannot exceed the institution's Tier 1 capital. Qualifying total capital
is  further  reduced  by the amount of the  bank's  investments  in banking  and
finance  subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal  cross-holdings  of  capital  securities  issued  by other  banks and
certain other deductions. Under the FDIC's risk-weighted system, all of a bank's
balance sheet assets and the credit  equivalent  amounts of certain  off-balance
sheet items are assigned to risk weight categories.  The aggregate dollar amount
of each category is multiplied by the risk weight assigned to that category. The
sum of these weighted values equals the bank's risk-weighted assets.

     Pursuant  to New Jersey  banking  law the  minimum  leverage  capital for a
depository  institution  is a ratio of Tier 1  capital  to  total  risk-weighted
assets of four percent. However, the Department may require a higher ratio for a
particular depository institution.

     New Jersey  banking law  requires  that a depository  institution  maintain
qualifying  capital of at least eight  percent of its risk weighted  assets.  At
least four  percent of this  qualifying  capital  shall be in the form of Tier 1
capital.  For purposes of New Jersey banking law, risk weighted  assets,  Tier 1
capital,  and  total  assets  are  defined  in the  same  manner  as in the FDIC
regulations.

     The  Bank  was in  compliance  in both  the  FDIC  and New  Jersey  capital
requirements at December, 31, 1998.

     Regulatory Capital Distributions.  Earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then  current  tax rate by the Bank on the  amount  of  earnings
removed from the reserves for such distributions.

     Dividends  payable by the Bank to the Company and dividends  payable by the
Company to stockholders are subject to various additional limitations imposed by
federal and state laws,  regulations  and policies  adopted by federal and state
regulatory agencies.

     Qualified  Thrift Lender Test. The Bank must maintain an appropriate  level
of certain investments ("Qualified Thrift Investments") and otherwise qualify as
a qualified thrift lender ("QTL"),  in order to continue to enjoy full borrowing
privileges  from  the FHLB NY.  The  required  percentage  of  Qualified  Thrift
Investments is 65% of portfolio assets.


                                       20

<PAGE>



     Transactions With Affiliates.  Generally, restrictions on transactions with
affiliates  require that transactions  between the Bank and its affiliates be on
terms as favorable to the Bank as transactions with non-affiliates. In addition,
certain of these  transactions  are  restricted  to a  percentage  of the Bank's
capital.  Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the Bank.  Within certain limits,  affiliates are
permitted to receive more favorable loan terms than non-affiliates.

Regulation of the Company

     General. As a bank holding company, Registrant is subject to regulation and
supervision  by the Board of Governors of the Federal  Reserve System and by the
Department.  This  regulation  is generally  intended to ensure that the Company
limits its activities to those allowed by law and that it operates in a safe and
sound manner without  endangering the financial  health of its subsidiary  bank.
The mutual  holding  company  is a bank  holding  company  and is subject to the
regulations summarized below.

     Federal Law and Other  Limitations.  A bank holding company may not acquire
direct or indirect  ownership or control of more than 5% of the voting shares of
any bank,  or  increase  its  ownership  or control of any bank,  without  prior
approval of the Federal Reserve.

     Federal law also prohibits a bank holding company, with certain exceptions,
from  acquiring  more than 5% of the voting  shares of any company that is not a
bank and from  engaging  in any  business  other  than  banking or  managing  or
controlling banks. The Federal Reserve is authorized to approve the ownership of
shares by a bank holding  company in any company,  the  activities  of which the
Federal  Reserve  has  determined  to be so  closely  related  to  banking or to
managing or controlling banks as to be a proper incident thereto.

     Regulatory  Capital  Requirements.  The Federal Reserve has adopted capital
adequacy  guidelines  pursuant to which it assesses  the  adequacy of capital in
examining and supervising a bank holding company and in analyzing  applications.
The Federal Reserve capital adequacy  guidelines are similar to those imposed on
the Bank by the FDIC.

     Commitments to Affiliated  Depository  Institutions.  Under Federal Reserve
policy, the Company will be expected to act as a source of financial strength to
the Bank and to commit  resources to support the Bank in  circumstances  when it
might not do so absent such policy. The enforceability and precise scope of this
policy is unclear.  However,  should the Bank require the support of  additional
capital  resources,  it is expected that the Company will be required to respond
with any such resources available to it.

     Restrictions  Applicable to New Jersey-Chartered  Mutual Holding Companies.
The Department is authorized to approve the  reorganization of a state chartered
savings bank to a mutual savings bank holding  company.  The general powers of a
mutual savings bank holding company are similar to the authorized  powers of New
Jersey corporations, subject to the interpretation of the Department.

Item 2. Description of Property

Properties and Equipment

     The Bank's  executive  offices  are  located at 531 North  Maple  Avenue in
Ridgewood,  New Jersey.  The Bank conducts its business  through three  offices,
which are located in Ridgewood and Mahwah, New

                                       21

<PAGE>



Jersey.  The  following  table  sets  forth the  location  of each of the Bank's
offices, the year the office was acquired and the net book value of each office.

                                                                     Net Book
                                   Year Facility                   Value as of
                                     Opened or        Leased or    December 31,
Office Location                      Acquired           Owned          1998
---------------                  ----------------      -------      -----------
Broad Street Office
  55 North Broad Street
  Ridgewood, NJ 07450                  1964            Leased         $291,000

Mahwah Office
  6 East Ramapo Avenue
  Mahwah, NJ 07430                     1995            Leased          237,000

Maple Avenue Office
  531 North Maple Avenue
  Ridgewood, NJ 07450                  1995             Owned        1,093,000
                                                                     ---------
TOTAL                                                               $1,621,000
                                                                     =========



     The Broad Street  office lease is dated April 6, 1975 with a term of thirty
years.  The Mahwah  office  lease has a term of twelve  years.  Each lease has a
renewal option.  The Bank has a limited service branch open several hours a week
that is located in a nursing home in Allendale, New Jersey.

     As of December 31, 1998, the net book value of land, buildings,  furniture,
and equipment owned by the Bank, less  accumulated  depreciation,  totalled $2.2
million.  The Bank has  purchased  a building to serve as an  additional  branch
office  and to  house  administrative  operations  of the  Bank.  The  Bank  has
estimated that the  acquisition and  refurbishment  costs for this purpose could
total approximately $6.2 million.

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

     There are various claims and lawsuits in which  Registrant is  periodically
involved,  such  as  claims  to  enforce  liens,   condemnation  proceedings  on
properties in which  Registrant holds security  interests,  claims involving the
making and  servicing  of real  property  loans,  and other  issues  incident to
Registrant's business.

     In the opinion of management,  no material loss is expected from any of the
pending claims or lawsuits.

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

     Not Applicable.



                                       22

<PAGE>



                                     PART II

Item  5.  Market for Common Equity and Related Stockholder Matters
------------------------------------------------------------------

     The  principal  trading  market for the common  stock of the Company is the
National Market of The Nasdaq Stock Market. There were no shares of common stock
of the Company  outstanding (other than in connection with the incorporation and
related matters) on or before January 7, 1999 and there was therefore no trading
in the common stock on or before  January 7, 1999.  The Company has never paid a
cash  dividend.  The ability of the Company to pay a dividend in the future will
be impacted by the ability of the Bank to pay dividends to its sole stockholder,
the Company.

     The Company is not  permitted to pay  dividends on its capital stock if its
stockholders'  equity  would  be  reduced  below  the  amount  required  for the
liquidation  account created in connection with the  reorganization  of the Bank
from mutual to stock form.  The Bank must  maintain at all times a surplus in an
amount  which  is at least  equal  to its  required  capital.  Dividends  may be
declared by the Company and paid to  stockholders  only out of  accumulated  net
earnings  after any  required  transfers  to surplus  and only if the  Company's
surplus would not be reduced by the payment of the dividend.

     In addition,  earnings of the Company and the Bank appropriated to bad debt
reserves  and deducted for federal  income tax  purposes are not  available  for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the  then-current tax rate by the Company and the Bank on the amount
of earnings deemed to be removed from the reserves for such distribution.

     If,  in the  future,  the  current  mutual  holding  company  structure  is
eliminated,  the  payment  of  dividends  by the  Company  to  its  stockholders
(including the mutual holding  company),  or the possible waiver of dividends by
the mutual  holding  company,  would result in adjustments to the exchange ratio
that   stockholders  of  the  Company  would  receive  in  connection  with  any
elimination of the mutual holding company structure.

     The  Reorganization,  including the initial  public  offering of the common
stock of the  Company,  was  completed  on January 7, 1999.  The  Reorganization
resulted in the issuance of 3,180,000  shares of common  stock,  $0.10 par value
per  share,  of the  Company  of which  1,494,600  shares  (47%)  were sold at a
purchase  price per share of $7.00 and  1,685,400  shares  (53%) were  issued to
Ridgewood  Financial,  MHC,  resulting  in gross  proceeds of  $10,462,200.  The
1,494,600  shares  constitute an amount  between the midpoint and maximum of the
range  registered  by means of a  registration  statement on Form SB-2 (file no.
333-62363)  that was declared  effective  on November 12, 1998.  The Company was
assisted by Ryan, Beck & Co., Inc. on a best efforts basis. Fees and expenses to
Ryan, Beck & Co., Inc. totaled $156,000.

     Total expenses were $700,000, resulting in net proceeds of $9.8 million.

     Approximately  half of the net proceeds,  $4,893,340,  was paid directly by
the Company to the Bank in return for 100,000 shares of common stock,  $2.00 par
value per share, of the Bank (100% of the issued and  outstanding  shares of the
Bank).  Of this  amount,  $200,000  constitutes  common stock of the Bank and an
additional $4,693,340 constitutes additional paid in capital of the Bank.

     In addition,  $200,000 was provided to Ridgewood Financial, MHC by the Bank
in connection with the Reorganization.

                                       23

<PAGE>

     The  remaining  $4,906,660 of the net proceeds was retained by the Company.
Of this amount, at February 28, 1999,  $552,681 was a direct payment in the form
of a loan by the Company to the Bank to fund the purchase by the employee  stock
ownership  plan of the Bank of 60,000 shares of the common stock of the Company.
The remaining amount,  $4,353,979,  was deposited by the Company into an account
at the Bank.  However,  additional shares may have been purchased since February
28, 1999,  or will be purchased,  by the employee  stock  ownership  plan of the
Bank.  Such  purchases  would be funded from the  $4,353,979  remaining  amount,
thereby reducing the remaining amount accordingly.

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

General

     The  Bank's  results  of  operations  are  primarily  dependent  on its net
interest income,  which is the difference  between the interest income earned on
assets,  primarily loans,  mortgage-backed  securities,  investments,  and other
interest earning assets less the interest expense on its liabilities,  primarily
deposits and borrowings.  Net interest income may be affected  significantly  by
general economic and competitive conditions,  particularly those with respect to
market interest rates,  and policies of regulatory  agencies.  Furthermore,  the
Bank's lending  activity is  concentrated in loans secured by real estate in the
Bank's  market area and therefore  the Bank's  operations  are affected by local
market conditions. The results of operations are also influenced by the level of
noninterest  expenses,  such as employees' salaries and benefits,  occupancy and
equipment  costs,  noninterest  income  such as loan  related  fees  and fees on
deposit related services, and the Bank's provision for loan losses.

Management Strategy

     The  Bank  has  historically  focused  on  offering  deposit  products  and
residential  mortgage  loans to customers in the town of Ridgewood and townships
of Allendale,  Franklin  Lakes,  Glen Rock,  Ho-Ho- Kus,  Mahwah,  Midland Park,
Oakland, Paramus, Ramsey, Ridgewood,  Saddle River, Upper Saddle River, Waldwick
and Wyckoff,  all of which are located in northwestern  Bergen County.  The Bank
generates net income  primarily by originating  and selling loans,  investing in
debt and  equity  securities  and  mortgage-backed  securities,  attracting  and
retaining  deposits by paying  competitive  interest  rates,  borrowing from the
Federal Home Loan Bank of New York and  maintaining  a high standard of customer
service as a local community savings bank.

     The Bank has been,  and  intends to  continue  to be, a  community-oriented
financial institution offering a variety of financial services.  During the past
several years, the competing financial  institutions  headquartered in Ridgewood
have  essentially  all been acquired by state-wide  and regional bank and thrift
holding companies. As a result, the Bank is the only remaining local institution
headquartered and managed in Ridgewood,  New Jersey.  The Bank believes that its
"hometown"  advantage  provides an  opportunity  to expand its operations as the
only local, independent financial institution. The Bank also believes it has the
ability  to  grow as a  result  of the  relatively  high  level  of  income  and
businesses operating in its primary market area.

     The  Bank's  strategy  is to  attempt to take  advantage  of the  favorable
demographic and economic conditions in its market area by continuing to increase
in size, focus on attracting core deposits,  and gradually shift its assets into
higher yielding loans. Total assets of the Bank have increased from $130.2

                                       24

<PAGE>


million at December 31, 1993,  to $274.7  million at December 31, 1998.  Much of
this increase was attributable to the opening of two new branch offices in 1996.
Management  believes that these two new offices,  which are located in Ridgewood
and Mahwah,  will help the Bank continue to meet the financial services needs of
its customers in an effective and personalized manner.

Comparison of Financial Condition at December 31, 1998 and December 31, 1997

     Total  assets  increased  by $45.6  million  or 19.9% to $274.7  million at
December 31, 1998 from $229.1  million at December 31, 1997.  This  increase was
primarily due to an increase in available for sale  mortgage-backed  securities,
federal funds sold and loans receivable, offset by decreases in held to maturity
and  available  for  sale  investment  securities,  as well as held to  maturity
mortgage-backed securities. Federal funds sold increased by $28.0 million due to
investment of initial public offering  subscription deposits received related to
the stock offering.  Available for sale mortgage-backed  securities increased by
$38.3 million,  as new purchases and  reinvestment  of prepayments of investment
securities  were  classified  as  available  for sale,  while  held to  maturity
mortgage-backed  securities  decreased  by $3.1  million.  Held to maturity  and
available for sale investment securities decreased by $18.3 million due to sales
and  redemption  of  callable  securities.  Many  of  the  agency  bonds  in the
investment securities portfolio had provisions allowing for the agency to redeem
its bonds prior to the stated  maturity.  Due to the decline in interest  rates,
many of these  bonds  were  redeemed  and the  investment  securities  portfolio
declined.  In  addition,  investment  securities  were sold to reduce the Bank's
interest rate risk. Future investment securities purchases will be classified as
available  for sale which will result in the  continued  reduction in investment
securities held to maturity.  Investment  securities  available for sale are not
expected  to further  decline as they have in the past due to the  reduction  in
amount in the  portfolio  that can be  redeemed  prior to stated  maturity.  The
portfolio  of  mortgage-backed  securities  is expected  to increase  due to its
current use in interest rate risk management and also as a result of the receipt
of proceeds from the offering. Loans receivable increased $1.3 million due to an
increase in mortgage  loan  originations  resulting  from higher  levels of loan
refinancings during a lower interest rate environment.

     The Bank's deposits,  increased by $11.6 million or 6.0 % to $205.5 million
at December 31, 1998,  due primarily to continued  deposit growth at both of its
new branches  opened in 1996.  Borrowings  increased  $16.3 million or 100.0% to
$32.6  million at December  31, 1998 from $16.3  million at December 31, 1997 as
the Bank used borrowings to lengthen the maturities of its liabilities to reduce
interest rate risk and to generate  additional  income as part of its leveraging
strategy. The leveraging strategy is designed to increase net interest income by
purchasing  mortgage-backed  securities  available for sale  utilizing  borrowed
funds.  The increase to net interest  income by this  strategy  will improve net
income;  however,  the targeted  spread on this  strategy  results in a negative
impact to the net interest margin.

     Total equity  increased  $228,000 to $17.4 million at December 31, 1998 due
to net income of $727,000  for 1998 offset by $514,000 of  unrealized  losses on
securities available for sale, net of taxes.

     The Bank  purchased  a  building  in March  1999 to serve as an  additional
branch office and to house  administrative  operations of the Bank. The Bank has
estimated that the  acquisition and  refurbishment  costs for this purpose could
total approximately $6.2 million.  The Bank could fund these costs with cash and
cash equivalents,  other maturing assets,  borrowings, or a combination thereof,
without reducing liquidity below required levels.


                                       25

<PAGE>

Comparison  Of  Operating  Results  For The Years  Ended  December  31, 1998 and
December 31, 1997

     Net Income.  Net income  decreased  $523,000 to $727,000 for the year ended
December  31, 1998 as compared to  $1,250,000  for the year ended  December  31,
1997.  Net  income was lower  primarily  due to a decrease  of  $302,000  in net
interest  income as a result of an increase in interest  expense on deposits and
borrowed funds totaling  $812,000,  offset by an increase in interest  income of
$510,000. In addition, there was an increase in loan loss provisions of $192,000
for the year ended  December 31, 1998,  as compared to the same period for 1997.
Further, non-interest expense increased $565,000.

     Net Interest  Income.  Net interest income before provision for loan losses
decreased by  approximately  $302,000 or 5.4% to $5.2 million for the year ended
December 31, 1998.  The decrease was  primarily  due to a decline in the average
yield on interest earning assets (on a tax equivalent  basis) of 41 basis points
from  7.40% for the year  ended  December  31,  1997 to 6.99% for the year ended
1998.  The  decrease  was also due to an  increase  in the  average  balances of
interest  bearing  liabilities  of $17.9 million or 8.8% from $203.2  million to
$221.1  million,  which was  slightly  offset by a 4 basis point  decline in the
average cost of interest bearing  liabilities.  The average balances of interest
earning assets increased by $21.0 million or 9.8 % from $215.1 million to $236.1
million.

     The Bank's interest rate spread,  which is the difference between the yield
on  average   interest   earning  assets  less  the  cost  of  interest  bearing
liabilities,  declined to 1.97 % for the year ended December 31, 1998, from 2.34
% for the year  ended  December  31,  1997.  This was  primarily  attributed  to
redemption of callable bonds,  higher  prepayments on mortgage backed securities
and loans  receivable with the proceeds  reinvested in lower yielding assets due
to the  general  decline  of market  interest  rates for these  instruments.  In
addition, competitive pressure on the pricing of loans and deposits has resulted
in a smaller  interest rate spread.  Competitive  pressure and the interest rate
environment in the future may further reduce the spread between asset yields and
the cost of funds.

     Interest  Income.  Interest income  increased to $16.3 million for the year
ended  December 31,  1998,  from $15.8  million for the year ended  December 31,
1997.  The increase  was due to higher  average  balances in available  for sale
securities  and other  interest  earning  assets,  offset by a  decrease  in the
average  balance  of loans  receivable  and  securities  held to  maturity.  The
decrease  in  securities  held  to  maturity  was  due  to  higher  prepayments,
redemption  and sales of  investment  securities.  The increase in available for
sale securities was due to  classification  of reinvested funds as available for
sale as well as purchases under the leverage strategy described previously.  The
average yield on interest  earning assets (on a tax equivalent  basis) decreased
from 7.40% for the year ended  December  31,  1997,  to 6.99% for the year ended
December 31, 1998,  due to redemption  and prepayment of higher coupon loans and
securities with reinvestment of proceeds into lower coupon  instruments during a
low interest rate environment with a flat yield curve.

     Interest  on  loans  receivable  decreased  by  $250,000  or 2.9 % to $ 8.3
million  for the year ended  December  31,  1998 from $ 8.6 million for the year
ended  December  31,  1997.  The  decrease  was due to a $1.6 million or a 1.5 %
decline in the average balance of loans  receivable  resulting from  prepayments
and amortization on mortgage loans in excess of new originations.  That decrease
was exacerbated by a decrease of 11 basis points in the average yield because of
lower  interest  rates  on  originated  loans  during  the 1998  period  and the
prepayment/amortization of higher rate loans.

     Interest expense.  Interest expense increased $812,000 to $11.1 million for
the year ended  December  31,  1998.  The  increase  was due to a $17.9  million
increase in the average balance of interest bearing liabilities partially offset
by a decrease of 4 basis points in the average cost of interest bearing

                                       26

<PAGE>

liabilities.  Interest  expense on time  deposits  increased  $560,000 due to an
increase  in the  average  balances  of time  deposits  of $9.7  million  and an
increase in the average cost of time deposits of 1 basis point. Interest expense
on demand deposit accounts  increased  $57,000 due to an increase in the average
balance of $3.1 million,  slightly  offset by a decline in the average cost of 1
basis  point.  In  addition,  interest  expense  on savings  deposits  increased
$163,000  due to an  increase in the  average  balance of $3.4  million to $28.7
million for the year ended  December  31, 1998 from $25.3  million for the prior
year ended,  as well as an increase of 20 basis  points in the average cost from
3.11% for 1997 compared to 3.31% for 1998.

     Provision for loan losses. The provision for loan losses for 1998 increased
$192,000,  thereby  increasing  the  allowance  for loan  losses to  $822,000 at
December  31,  1998.  This  increase  in  the  allowance  reflects  management's
evaluation  of the inherent  risk in the Bank's loan  portfolio and the level of
nonperforming assets, as well as management's evaluation of the general economic
conditions  in the Bank's  market  area,  in  addition to a  comparison  of loss
experience  at  the  Bank  and  loss  experience  and  reserve  levels  at  peer
institutions.  In  addition,  the  allowance  was  increased  as a result of the
changing  composition  of the loan  portfolio  with an  increasing  emphasis  on
commercial real estate and consumer loans.

     Non-interest  income.  Non-interest income decreased by $33,000 to $199,000
for the year ended December 31, 1998,  from $232,000 for the year ended December
31,  1997.  Fees and  service  charges  increased  $26,000 due to an increase in
non-customer ATM transaction fees, while gains on sales/redemption of securities
increased  $5,000.  These  were  offset by a decline  in gains on loan  sales of
$24,000.  Other  non-interest  income  declined  by  $40,000  for the year ended
December 31, 1998,  primarily due to the absence of a gain on sale of other real
estate.

     Non-interest expenses.  Non-interest expenses increased by $565,000 to $4.2
million  for the year ended  December  31,  1998 from $3.7  million for the year
ended December 31, 1997. The increase was primarily due to increases of $312,000
in salaries  and  benefits  resulting  from an increase in staff,  increases  in
medical  insurance  rates,  recognition  of expenses  for new benefit  plans for
senior executives and the Board of Directors, as well as normal salary and merit
increases.   Occupancy  and  equipment   expenses   increased   $111,000  mostly
attributable to increases in computer service expense of $81,000  resulting from
an increase in account  volumes and  including  $20,000 in year 2000  compliance
costs.  In addition,  the Bank wrote off  approximately  $75,000 during 1998 for
non-compliant  computer  equipment.  Other  non-interest  expense  increased  by
$134,000 to $590,000 for the year ended December 31, 1998, from $456,000 for the
year ended  December 31, 1997.  This  increase was due to a $20,000  increase in
consultants  fees  due to  costs  associated  with  strategic  planning,  and an
increase of $37,000 for increased  legal and accounting  fees resulting from the
reorganization.  In  addition,  appraisal  fees  increased  by $29,000 due to an
increase in loan origination volume.  Noninterest  expenses will likely increase
in future  periods  because  of the costs  associated  with our  employee  stock
ownership  plan, the restricted  stock plan we expect to implement and the costs
of being a public company.

     Income Taxes. Income taxes decreased by approximately  $569,000 to $272,000
for 1998 as compared to $841,000 for 1997. The decrease was primarily due to the
decrease in income before taxes as discussed  above and an increase in levels of
tax exempt securities.


                                       27

<PAGE>

Comparsion  Of  Operating  Results  For The Years  Ended  December  31, 1997 and
December 31, 1996

     Net Income.  Net income increased $510,000 or 68.9% to $1.3 million for the
year ended December 31, 1997 as compared to $740,000 for the year ended December
31, 1996. Net income  increased  primarily as a result of a decrease of $534,000
in  non-interest  expenses.  This  decrease was mainly due to the absence of the
one-time SAIF Special Assessment which occurred in 1996.

     Net Interest  Income.  Net interest income increased by $103,000 or 1.9% to
$5.5 million for the year ended  December 31, 1997.  The increase was  primarily
due to an increase in the average  balances of interest  earning assets of $16.8
million or 8.5% from $198.3  million to $215.1  million,  but was offset by a 15
basis point  decline in the average yield on interest  earning  assets (on a tax
equivalent  basis).  The  average  balances  of  interest  bearing   liabilities
increased by $15.6 million or 8.3% from $187.7  million to $203.2  million,  and
were  subject to a slight  decrease  in the  average  cost of  interest  bearing
liabilities of 1 basis point from 5.07% for the year ended December 31, 1996, to
5.06% for the year ended 1997.

     The Bank's interest rate spread (on a tax equivalent  basis),  which is the
difference between the yield on average interest earning assets less the cost of
interest bearing liabilities, declined to 2.30 % for the year ended December 31,
1997, from 2.48 % for the year ended December 31, 1996.

     Interest  Income.  Interest income  increased to $15.8 million for the year
ended  December 31,  1997,  from $15.0  million for the year ended  December 31,
1996.  The increase was due to higher average  balances in loans  receivable and
available for sale  securities,  offset by a decrease in the average  balance of
held to maturity securities. The decrease in held to maturity securities was due
to higher  prepayments,  redemption  and  sales of  investment  securities.  The
increase  in  available  for  sale  securities  was  due  to  classification  of
reinvested  funds as available for sale.  The average yield of interest  earning
assets  decreased  from 7.55% for the year ended December 31, 1996, to 7.40% for
the  year  ended  December  31,  1997,  due to  lower  interest  rates  on  such
instruments for the 1997 period as compared to 1996.

     Interest  on  loans  receivable  increased  by  $295,000  or 3.6 % to $ 8.6
million  for the year ended  December  31,  1997 from $ 8.3 million for the year
ended December 31, 1996. The increase was due to a $4.6 million  increase or 4.5
% in the average  balance of loans  receivable  resulting from a net increase in
one - to four - family residential  mortgage loans, due to continued  acceptance
of the Bank's first time  home-buyers  program and  marketing of loan  products.
That increase was offset somewhat by a decrease of 7 basis points in the average
yield  because  of lower  interest  rates on  originated  loans  during the 1997
period.

     Interest expense.  Interest expense increased $765,000 to $10.3 million for
the year ended  December  31,  1997.  The  increase  was due to a $15.6  million
increase in the average balance of interest bearing liabilities partially offset
by a  decrease  of 1  basis  point  in the  average  cost  of  interest  bearing
liabilities.  Interest expense on time deposits increased $1.2 million partially
offset by a $567,000 decrease in interest on borrowings. The increase was due to
increased  time deposit  balances  primarily  from the two new  branches  opened
during 1996.  These funds were used to reduce short term  borrowings in order to
lower the Bank's interest rate risk position.


                                       28

<PAGE>

     Provision for loan losses.  The provision for loan losses for 1997 remained
at $12,000, thereby increasing the allowance for loan losses to $618,000 for the
year  ended  December  31,  1997.  This  increase  in  the  allowance   reflects
management's  evaluation of the inherent risk in the Bank's loan  portfolio,  as
well as management's evaluation of the general economic conditions in the Bank's
market area.

     Non-interest  income.  Non-interest income increased by $86,000 or 58.9% to
$232,000 for the year ended December 31, 1997,  from $146,000 for the year 1996.
Fees and service charges  increased $41,000 due to an increase of $14,000 in ATM
fees due to the first full year of operation in 1997, and an increase of $39,000
in checking account fees.  Gains on loan sales increased by $31,000,  which were
mostly offset by a decrease of $26,000 in gains on sales of securities.

     Non-interest expenses.  Non-interest expenses decreased by $534,000 to $3.7
million  for the year ended  December  31,  1997 from $4.2  million for the year
ended  December 31, 1996.  The decrease was  primarily due to the absence of the
one-time special SAIF  assessment,  paid in 1996 to the FDIC by all SAIF members
to recapitalize  the SAIF, which amounted to $830,000 for the Bank. In addition,
deposit  insurance  premiums  decreased  $140,000 to $110,000 for the year ended
December  31, 1997 from  $250,000 for the year ended  December 31, 1996,  as the
FDIC lowered  insurance  premiums  shortly  following the one-time  special SAIF
assessment.  These  decreases were partially  offset by increases of $235,000 in
salaries  and  benefits  due to the  impact  of a full  year of  operation  with
increased personnel resulting from the Bank's two de-novo branches opened during
1996, as well as normal salary and merit increases. Additional increases for the
year ended  December 31, 1997 in occupancy  and  equipment  expenses of $156,000
were  mostly  attributable  to the  first  full  year of  operation  for the two
additional branch offices.  Other non-interest  expenses increased by $73,000 to
$456,000 for the year ended December 31, 1997, from $383,000 for the year ending
December 31, 1996,  mostly  attributed  to an increase of $32,000 for other real
estate expense stemming from various foreclosure costs.

     Income Taxes. Income taxes increased by approximately  $213,000 or 33.9% to
$841,000 for 1997 as compared to $628,000 for 1996.  The increase was  primarily
due to the increase in income before taxes as discussed above,  partially offset
by an increase in tax exempt income.



                                       29

<PAGE>

<TABLE>
<CAPTION>
                                                                          For the Years Ended December 31,
                                             ---------------------------------------------------------------------------------------
                                                         1998                           1997                           1996
                                             -----------------------------  ---------------------------- ---------------------------

                                             Average             Average    Average            Average   Average           Average
                                             Balance  Interest  Yield/Cost  Balance  Interest Yield/Cost Balance Interest Yield/Cost
                                             -------  --------  ----------  -------  -------- ---------- ------- -------- ----------
                                                                               (Dollars in thousands)
INTEREST-EARNING ASSETS:
<S>                                        <C>        <C>        <C>      <C>       <C>        <C>      <C>        <C>       <C>  
  Loans receivable, net (1).................$105,411   $ 8,312     7.89%   $106,991  $ 8,562     8.00%   $102,411   $ 8,267    8.07%
  Securities held to maturity (2)...........  17,171     1,157     6.74      26,181    1,824     6.97      32,755     2,305    7.04
  Securities available for sale (3).........  93,482     5,922     6.33      70,563    4,862     6.89      56,097     4,002    7.13
  Other interest-earning assets (4).........  20,078     1,124     5.60      11,382      670     5.89       7,051       396    5.62
                                             -------    ------             --------  -------             --------  --------
    Total interest-earning assets........... 236,142    16,515     6.99     215,117   15,918     7.40     198,314    14,970    7.55
  Noninterest-earning assets................   5,280                          5,569                         5,591
                                             -------                       --------                      --------
    Total assets............................$241,422                       $220,686                      $203,905
                                             =======                        =======                       =======
INTEREST-BEARING LIABILITIES:
  Deposit accounts:
   DDA accounts.............................$ 13,500       252     1.87    $ 10,358      195     1.88    $  7,170       139    1.94
   Savings accounts.........................  28,671       948     3.31      25,260      785     3.11      22,218       663    2.98
   Money market deposit accounts............   4,102       123     3.00       4,051      121     2.99       4,068       122    3.00
   Certificates of deposit.................. 151,232     8,441     5.58     141,564    7,881     5.57     122,001     6,726    5.51
  Borrowed funds............................  23,596     1,335     5.66      22,012    1,305     5.93      32,210     1,872    5.81
                                             -------    ------             --------   ------             --------    ------
    Total interest-bearing liabilities...... 221,101    11,099     5.02     203,245   10,287     5.06     187,667     9,522    5.07
                                                        ------                        ------                         ------
  Noninterest-bearing liabilities...........   2,740                          1,552                         1,538
                                             -------                       --------                      --------
    Total liabilities....................... 223,841                        204,797                       189,205
Total equity................................  17,581                         15,889                        14,700
                                             -------                       --------                      --------
    Total liabilities and total equity......$241,422                       $220,686                      $203,905
                                             =======                        =======                       =======
   Net interest income......................            $5,416                        $5,631                        $ 5,448
                                                         =====                         =====                         ======
   Interest rate spread (5).................                       1.97%                         2.34%                         2.48%
   Net interest margin (6)..................                       2.29%                         2.62%                         2.75%
 Ratio of average interest-earning assets                          1.07X
   to average interest-bearing liabilities..                                                     1.06X                         1.06X

</TABLE>

-----------------------
(1)  Loans receivable,  net includes  non-accrual loans.  Interest includes loan
     origination fees, which are immaterial.
(2)  Includes mortgage-backed and investment securities held to maturity. Yields
     on tax exempt obligations were computed on a tax equivalent basis.
(3)  Investments,  mortgage-backed  securities,  and  loans  held  for  sale are
     carried at market value.  Yields on tax exempt obligations were computed on
     a tax equivalent basis.
(4)  Includes   federal   funds   sold,   Federal   Home  Loan  Bank  stock  and
     interest-earning deposits.
(5)  Interest rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(6)  Net  interest  margin  represents  net interest  income  divided by average
     interest-earning assets.

                                       30

<PAGE>



                              Rate/Volume Analysis

     Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning  assets and interest-bearing  liabilities and
changing volume or amount of these assets and  liabilities.  The following table
represents  the extent to which  changes in  interest  rates and  changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Bank's  interest income and interest  expense during the periods  indicated.
Information   is  provided  in  each   category  with  respect  to  (i)  changes
attributable  to changes in volume (change in volume  multiplied by prior rate),
(ii) changes attributable to changes in rate (change in rate multiplied by prior
volume),  and (iii) the net change.  Changes attributable to the combined impact
of volume  and rate have been  allocated  proportionately  to the  change due to
volume and the changes due to rate.
<TABLE>
<CAPTION>
                                           Years Ended December 31,     Years Ended December 31,
                                       ----------------------------   ----------------------------
                                             1998     vs.     1997        1997     vs.     1996
                                       ----------------------------   ----------------------------
                                              Increase (Decrease)          Increase (Decrease)
                                                    Due to                       Due to
                                       ----------------------------   ----------------------------
                                       Volume      Rate       Net      Volume      Rate       Net
                                       ------      ----       ---      ------      ----       ---
                                                              (In thousands)
Interest income:
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>    
  Loans receivable, net ...........   $  (129)   $  (121)   $  (250)   $   368    $   (73)   $   295
  Securities held to maturity .....      (609)       (58)      (667)      (459)       (22)      (481)
  Securities available for sale ...     1,480       (420)     1,060      1,000       (140)       860
  Other interest earning assets ...       489        (35)       454        250         24        274
                                      -------    -------    -------    -------    -------    -------
    Total .........................   $ 1,231    $  (634)   $   597    $ 1,159    $  (211)   $   948
                                      =======    =======    =======    =======    =======    =======
Interest expense:
  NOW Accounts ....................   $    58    $    (1)   $    57    $    60    $    (4)   $    56
  Passbook accounts ...............       110         53        163         92         30        122
  Money market accounts ...........         2       --            2         (1)      --           (1)
  Certificates of deposit .........       546         14        560      1,084         71      1,155
  Borrowed funds ..................        91        (61)        30       (604)        37       (567)
                                      -------    -------    -------    -------    -------    -------
    Total .........................   $   807    $     5    $   812    $   631    $   134    $   765
                                      =======    =======    =======    =======    =======    =======

Net change in net interest income .   $   424    $  (639)   $  (215)   $   528    $  (345)   $   183
                                      =======    =======    =======    =======    =======    =======

</TABLE>

                                       31

<PAGE>


Asset and Liability Management

     The Bank,  like many other  financial  institutions,  is  vulnerable  to an
increase  in  interest  rates to the extent  that  interest-bearing  liabilities
generally  mature or reprice  more  rapidly than  interest-earning  assets.  The
lending  activities of the Bank have historically  emphasized the origination of
long-term, fixed rate loans secured by single family residences, and the primary
source of funds has been deposits with substantially  shorter maturities.  While
having   interest-bearing   liabilities   that  reprice  more   frequently  than
interest-earning  assets is generally beneficial to net interest income during a
period  of  declining  interest  rates,  such  an  asset/liability  mismatch  is
generally detrimental during periods of rising interest rates.

     To reduce the effect of interest  rate changes on net  interest  income the
Bank has  adopted  various  strategies  to  enable  it to  improve  matching  of
interest-earning asset maturities to interest-bearing  liability maturities. The
principal  elements  of these  strategies  include:  (1)  purchasing  investment
securities  with  maturities  that  match  specific  deposit   maturities;   (2)
emphasizing  origination of shorter-term  consumer  loans,  which in addition to
offering  more rate  flexibility,  typically  bear  higher  interest  rates than
residential mortgage loans; (3) purchasing mortgage-backed securities to provide
monthly cash flows; and (4) originating adjustable-rate loans. Although consumer
loans  inherently  generally  possess  a higher  credit  risk  than  residential
mortgage loans, the Bank believes that its underwriting  standards will minimize
this risk.

     A principal part of the Bank's strategy is to manage interest rate risk and
reduce  the  exposure  of the Bank's  net  interest  income to changes in market
interest  rates.  Accordingly,   the  Board  of  Directors  has  established  an
Asset/Liability  Committee that is responsible  for evaluating the interest rate
risk inherent in the Bank's  assets and  liabilities,  determining  the level of
risk  that  is  appropriate  given  the  Bank's  business  strategy,   operating
environment,  capital,  liquidity and performance objectives,  and managing this
risk  consistent  with the  guidelines  approved by the Board of Directors.  The
Asset/Liability Committee consists of senior management operating under a policy
adopted by the Board of  Directors  and meets at least  quarterly  to review the
Bank's asset/liability policies and interest rate position.

     Exposure to interest  rate risk is actively  monitored by  management.  The
Bank's  objective  is to maintain a  consistent  level of  profitability  within
acceptable  risk  tolerances  across a broad range of  potential  interest  rate
environments.  The Bank uses the FDIC  Regulatory  Analysis Model to monitor its
exposure to interest  rate risk,  which  calculates  changes in market  value of
portfolio equity and net income. Reports generated from assumptions provided and
modified by management are reviewed by the Asset/Liability  Management Committee
and reported to the Board of Directors quarterly. The Balance Sheet Shock Report
shows the degree to which  balance  sheet  line  items and the  market  value of
portfolio  equity  are  potentially  affected  by a 200 basis  point  upward and
downward  parallel  shift (shock) in the Treasury  yield curve.  An Income Shock
Report shows the degree to which income  statement line items and net income are
potentially  affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve. The Bank also receives reports that show the impact on
portfolio  equity of upward and downward  shifts in interest  rates of between 0
and 400 basis points.


                                       32

<PAGE>

     The following table sets forth, as of December 31, 1998, an estimate of the
projected  changes in the economic value of equity ("EVE") of instantaneous  and
permanent increases and decreases in market interest rates in the amount of 100,
200,  300,  and 400 basis points  ("bp").  One hundred  basis points  equals one
percent. Dollar amounts are expressed in thousands.


                     Economic Value of Equity          EVE as % of PV of Assets
     Change    ------------------------------------    ------------------------
    in Rates   $ Amount      $ Change      % Change      EVE Ratio    BP Change
   ----------  --------      --------       -------    ------------  ----------
     +400 bp     8,516       (13,442)       (61.2)%        3.3%      (450)bp
     +300       11,936       (10,022)       (45.6)         4.6       (320)
     +200       15,262        (6,696)       (30.5)         5.7       (210)
     +100       18,737        (3,221)       (14.7)         6.8       (100)
        0       21,958                                     7.8     
      100       23,859         1,901          8.7          8.3         50
     -200       23,604         1,646          7.5          8.1         30
     -300       22,880           922          4.2          7.8         --
     -400       22,928           970          4.4          7.7        (10)
                                                                

     This table shows that the Bank's  economic  value of equity would  decrease
with rising  interest rates while  decreasing,  increasing or remaining the same
with falling  interest rates.  However,  computations of prospective  effects of
hypothetical interest rate changes are based on numerous assumptions,  including
relative levels of market interest rates,  loan repayments and deposit  runoffs,
and may not be indicative of actual results. The computations do not reflect any
actions the Bank may undertake in response to changes in interest rates although
management  cannot always predict  future  interest rates or their effect on the
Bank.  Certain  shortcomings are inherent in the method of analysis presented in
the computation of EVE. For example, although certain assets and liabilities may
have similar  maturities  or periods to  repricing,  they may react in differing
degrees to changes in market interest rates. Additionally,  certain assets, such
as adjustable rate loans,  have features that restrict changes in interest rates
during the initial term and over the remaining  life of the asset.  Further,  in
the event of a change in interest rates,  prepayment and early withdrawal levels
could  deviate  significantly  from those  assumed in the  table.  Finally,  the
ability of many borrowers to service their  adjustable rate debt may decrease in
the event of an interest rate increase.

Liquidity and Capital Resources

     The Bank's primary  sources of funds are deposits,  wholesale  funding from
the Federal  Home Loan Bank,  principal  and  interest  payments  on loans,  and
securities,  and to a lesser  extent,  proceeds  from  the sale of loans  and/or
securities.  While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates,   economic  conditions,   and  competition  strongly  influence  mortgage
prepayment rates and deposit flows, reducing the predictability of the timing of
sources of funds.

     The primary investing activities of the Bank are the origination of one- to
four-family  residential  and, to a lesser  extent,  commercial  real estate and
multi-family   mortgage  loans,   and  the  purchase  of   mortgage-backed   and
mortgage-related and debt securities.  During the years ended December 31, 1998,
1997 and 1996,  the Bank's  disbursements  for loan  originations  totaled $29.0
million,   $14.1  million  and  $29.9   million,   respectively.   Purchases  of
mortgage-backed,  mortgage-related  and debt  securities  totaled $83.1 million,
$42.4 million and $57.2  million,  for years ended  December 31, 1998,  1997 and
1996,  respectively.  These  activities  were funded  primarily  by deposits and
borrowings, principal repayments

                                       33

<PAGE>



and prepayments on loans,  mortgage-backed and mortgage-related  securities, and
debt securities.  In addition,  sales of loans and securities available for sale
provided  additional  liquidity to the Bank. Loan sales totaled  $771,000,  $3.6
million and  $750,000  for the years ended  December  31,  1998,  1997 and 1996,
respectively. Proceeds from sales of available for sale securities totaled $10.5
million,  $17.5 million and $15.7 million for the years ended December 31, 1998,
1997 and  1996,  respectively.  The Bank  experienced  a net  increase  in total
deposits of $11.6 million,  $23.3 million and $23.5 million for the fiscal years
ended December 31, 1998, 1997 and 1996, respectively. Deposit flows are affected
by the  level of  market  interest  rates,  as well as the  interest  rates  and
products offered by local competitors and the Bank and other factors.

     The Bank closely monitors its liquidity  position on a daily basis.  Excess
short-term  liquidity is invested in overnight  federal  funds sold. On a longer
term basis, the Bank invests in various lending  products,  mortgage-backed  and
mortgage-related and investment  securities.  The Bank may borrow funds from the
Federal  Home Loan Bank  subject to certain  limitations.  Based on the level of
qualifying  collateral  available to secure  advances at December 31, 1998,  the
Bank's borrowing limit from the Federal Home Loan Bank was  approximately  $82.4
million,  with unused  borrowing  capacity of $49.9 million at that date.  Other
sources of liquidity include borrowings under repurchase agreements and sales of
available for sale securities.

     The Bank's most liquid assets are cash and cash equivalents,  which include
interest-bearing  deposits and  short-term  highly liquid  investments  (such as
federal funds sold) with original  maturities of less than three months that are
readily  convertible  to known  amounts  of cash.  The level of these  assets is
dependent on the Bank's operating, financing and investing activities during any
given period.  At December 31, 1998,  1997 and 1996,  cash and cash  equivalents
totaled $43.5 million,  $15.4  million,  and $6.4 million,  respectively,  which
amounted to 15.8%, 6.7% and 3.0% of total assets at those dates.

     Loan commitments  totaled $13.9 million at December 31, 1998,  comprised of
$6.6 million in one- to four-family loan  commitments,  $110,000 in construction
loan commitments,  $6.9 million in home equity loan commitments, and $256,000 in
checking line of credit loan  commitments.  Management  of the Bank  anticipates
that  it  will  have  sufficient  funds  available  to  meet  its  current  loan
commitments.

     At December  31, 1998,  the Bank  exceeded  all of its  regulatory  capital
requirements  with a  leverage  capital  level  of  $17.7  million,  or 17.7% of
adjusted assets,  which is above the required level of $4.0 million,  or 4.0% of
adjusted  assets and total  risk-based  capital of $18.5  million,  or 18.57% of
adjusted assets, which is above the required level of $8.0 million, or 8.00%.

     The  liquidity  of a banking  institution  reflects  its ability to provide
funds to meet loan requests,  to accommodate possible outflows in deposits,  and
to take  advantage  of  interest  rate  market  opportunities.  Funding  of loan
requests,  providing for  liability  outflows,  and  management of interest rate
fluctuations  require  continuous  analysis in order to match the  maturities of
specific  categories of short-term  loans and investments with specific types of
deposits and borrowings.  Savings bank liquidity is normally considered in terms
of the nature and mix of the banking institution's sources and uses of funds.

     Management is not aware of any known trends,  events or uncertainties  that
will have or are  reasonably  likely  to have a  material  effect on the  Bank's
liquidity,  capital or  operations  nor is  management  is aware of any  current
recommendation by regulatory authorities,  which if implemented, would have such
an effect.


                                       34

<PAGE>



Recent Accounting Pronouncements

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No.  133  "Accounting  for  Derivative   Instruments  and  Hedging   Activities"
(Statement  No. 133).  Statement No. 133  establishes  accounting  and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  It requires that an entity  recognize all  derivatives  as
either assets or liabilities in the statement of financial  position and measure
those  instruments at fair value.  Statement No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.  Initial  application of
this Statement  should be as of the beginning of an entity's fiscal quarter,  on
that  date,  hedging  relationships  must be  designated  a new  and  documented
pursuant to the provisions of this Statement.  Earlier application of all of the
provisions of Statement No. 133 is  encouraged,  but it is permitted  only as of
the  beginning  of any  fiscal  quarter  that  begins  after  issuance  of  this
Statement.  This  Statement  should not be applied  retroactively  to  financial
statements  of  prior  periods.  The  implementation  of this  Statement  is not
expected  to have a material  impact on the  financial  condition  or results of
operations of the Bank.

Year 2000 Evaluation

     Rapid and accurate data  processing is essential to the Bank's  operations.
Many  computer  programs that can only  distinguish  the final two digits of the
year entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute  payment,  interest,  delinquency  and  other  data.  The  Bank has been
evaluating both information  technology  (computer systems) and  non-information
technology  systems  (e.g.,  vault  timers,  electronic  door lock and  heating,
ventilation  and air  conditioning  controls).  The Bank has examined all of its
non-information  technology  systems and has either received  certifications  of
year  2000  compliance  for  systems  controlled  by third  party  providers  or
determined  that the systems  should not be impacted by the year 2000.  The Bank
expects  to further  test the  systems  it  controls  and  receive  third  party
certification,  where appropriate, that they will continue to function. The Bank
does not expect any  material  costs to address its  non-information  technology
systems and has not had any material costs to date. The Bank has determined that
the information  technology  systems it uses have  substantially  more year 2000
risk than the non-information technology systems it uses. The Bank has evaluated
its information  technology  systems risk in three areas: (1) our own computers,
(2) computers of others used by our  borrowers,  and (3) computers of others who
provide us with data processing.

     Our own  computers.  We  expect  to spend  approximately  $200,000  through
December 31, 1999 to upgrade our computer  system.  We expect to capitalize this
cost. This upgrade is expected to eliminate the year 2000 risk in our computers.
We do not expect to have material costs to address this risk area after December
31,  1998.  At December 31, 1998,  $193,000 of the  estimated  $200,000 had been
capitalized.  In addition to this $200,000,  we expensed  approximately  $75,000
during  1998 for non-  compliant  computer  equipment  and  $20,000 in year 2000
compliance costs.

     Computers of others used by our  borrowers.  We have  evaluated most of our
borrowers and do not believe that the year 2000 problem should,  on an aggregate
basis,  impact their  ability to make payments to the Bank. We believe that most
of our  residential  borrowers  are not  dependent on their home  computers  for
income and that none of our  commercial  borrowers are so large that a year 2000
problem  would  render  them  unable to collect  revenue  or rent and,  in turn,
continue to make loan payments to the Bank.  As a result,  we have not contacted
residential  borrowers  concerning  this issue and do not consider this issue in
our residential loan underwriting process. We have begun contacting our

                                       35

<PAGE>



commercial  borrowers with loans of $250,000 or more and considering  this issue
during  commercial  loan   underwriting.   At  December  31,  1998  these  loans
constituted $6.6 million or 82.1% of our $8.0 million commercial loan portfolio.
We do not expect any material costs to address this risk area.

     Computers  of others  who  provide  us with data  processing.  This risk is
primarily focused on one third party service bureau that provides  virtually all
of the Bank's data  processing.  This service  bureau is not year 2000 compliant
but has advised us that it expects to be compliant before the year 2000. If this
problem  is not  solved  before  the  year  2000,  we  would  likely  experience
significant  delays,  mistakes or failures.  These delays,  mistakes or failures
could  have a  significant  impact on our  financial  condition  and  results of
operations.

     Contingency  Plan. We are monitoring our service bureau to evaluate whether
our data  processing  system  will fail.  We are being  provided  with  periodic
updates on the status of testing and upgrades being made by the service  bureau.
If our service bureau fails,  we will attempt to locate an  alternative  service
bureau  that is year  2000  compliant.  If we are  unsuccessful,  we will  enter
deposit and loan  transactions  by hand in our general  ledger and compute  loan
payments and deposit balances and interest with our existing computer system. We
can do this because of our relatively  small number of loan and deposit accounts
and our internal bookkeeping system. Our computer systems are independently able
to generate  labels and mailings for all of our  customers  and we  periodically
test this  system and print and store  this  material.  If this labor  intensive
approach  is  necessary,  management  and our  employees  will  become much less
efficient.  However,  we believe that we would be able to operate in this manner
indefinitely,  until our existing service bureau, or their replacement,  is able
to again provide data  processing  services.  If very few financial  institution
service bureaus were operating in the year 2000, our replacement costs, assuming
we could negotiate an agreement, could be material.

Effect of Inflation and Changing Prices

     The Bank's financial statements and related data presented herein have been
prepared in accordance  with generally  accepted  accounting  principles,  which
require the measurement of financial  position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies,  virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result,  interest  rates  have a more  significant  impact  on a  financial
institution's  performance  than the  effects  of general  levels of  inflation.
Interest  rates do not  necessarily  move in the same direction or with the same
magnitude as the prices of goods and services.

     Inflation  can have a more  direct  impact  on  categories  of  noninterest
expenses such as salaries and wages,  supplies and employee benefit costs. These
expenses normally fluctuate more in line with changes in the general price level
and are very closely  monitored by management  for both the effects of inflation
and increases  related to such items as staffing  levels,  usage of supplies and
occupancy costs.


                                       36
<PAGE>

Item  7.  Financial Statements


                          Independent Auditors' Report


The Board of Directors
Ridgewood Financial, Inc.:


We have audited the consolidated  statements of financial condition of Ridgewood
Financial,  Inc. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated  statements of income, equity, and cash flows for each of the years
in the three-year period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Ridgewood Financial,
Inc. and  subsidiary as of December 31, 1998 and 1997,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.


                                                  /s/KPMG LLP
                                                  ------------------------------
                                                  KPMG LLP


Short Hills, New Jersey
January 21, 1999

                                       37

<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                 Consolidated Statements of Financial Condition

                           December 31, 1998 and 1997

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                         Assets                                           1998        1997
                                                                       ---------   ---------
<S>                                                                 <C>            <C>    
Cash and due from banks                                               $    2,274       2,198
Federal funds sold                                                        41,200      13,200
                                                                       ---------   ---------
                   Cash and cash equivalents                              43,474      15,398

Investment securities:
    Held to maturity (fair value of $1,374 and $9,724
       at December 31, 1998 and 1997, respectively)                        1,354       9,666
    Available for sale                                                    16,921      26,954
Mortgage-backed securities:
    Held to maturity (fair value of $ 11,409 and $14,522
       at December 31, 1998 and 1997)                                     11,277      14,356
    Available for sale                                                    88,390      50,099
Loans held for sale                                                           --         750
Loans receivable, net                                                    107,021     105,715
Accrued interest receivable                                                1,387       1,609
Premises and equipment, net                                                2,218       2,253
Federal Home Loan Bank stock, at cost                                      1,949       1,949
Other assets                                                                 742         316
                                                                       ---------   ---------
                   Total assets                                       $  274,733     229,065
                                                                       =========   =========
                 Liabilities and Equity
Deposits                                                              $  205,529     193,889
Borrowed funds                                                            32,557      16,282
Initial public offering subscriptions payable                             17,809          -- 
Advances from borrowers for taxes and insurance                              926         902
Accounts payable and other liabilities                                       490         798
                                                                       ---------   ---------
                   Total liabilities                                     257,311     211,871
                                                                       ---------   ---------
Equity:
    Retained earnings                                                     17,693      16,966
    Accumulated other comprehensive income                                  (271         228
                                                                       ---------   ---------
                   Total equity                                           17,422      17,194

Commitments and contingencies

                   Total liabilities and equity                       $  274,733     229,065
                                                                       =========   =========
</TABLE>


See accompanying notes to consolidated financial statements.

                                       38
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                        Consolidated Statements of Income

                  Years ended December 31, 1998, 1997 and 1996

                                 (In thousands)
<TABLE>
<CAPTION>
                                                                     1998            1997             1996
                                                                 ------------     -----------      ----------
<S>                                                               <C>              <C>              <C>    
Interest income:
    Loans receivable                                               $   8,312           8,562           8,267  
    Investment securities                                                286             756           1,134  
    Mortgage-backed securities                                           871           1,068           1,171  
    Securities available for sale                                      5,751           4,778           3,998  
    Other                                                              1,124             670             396  
                                                                    --------        --------        --------   
                   Total interest income                              16,344          15,834          14,966  

Interest expense:
    Deposits                                                           9,764           8,982           7,650  
    Borrowed funds                                                     1,335           1,305           1,872  
                                                                    --------        --------        --------   
                   Total interest expense                             11,099          10,287           9,522  
                                                                    --------        --------        --------   

                   Net interest income                                 5,245           5,547           5,444  

Provision for loan losses                                                204              12              12  
                                                                    --------        --------        --------  

                   Net interest income after
                     provision for loan losses                         5,041           5,535           5,432  
                                                                    --------        --------        --------   

Noninterest income:
    Fees and service charges                                             140             114              73  
    Gain on sale of securities                                            24              19              45  
    Gain on sale of loans                                                 21              45              14  
    Other                                                                 14              54              14  
                                                                    --------      ----------        --------   

                   Total noninterest income                              199             232             146  
                                                                    --------      ----------        --------   

Noninterest expenses:
    Salaries and benefits                                              2,238           1,926           1,691  
    Occupancy and equipment                                            1,145           1,034             878  
    Advertising and promotion                                            150             150             178  
    SAIF deposit insurance premium                                       118             110             250  
    SAIF assessment                                                       --              --             830  
    Other expenses                                                       590             456             383  
                                                                    --------      ----------        --------   

                   Total noninterest expenses                          4,241           3,676           4,210  
                                                                    --------      ----------        --------   

                   Income before income taxes                            999           2,091           1,368  

Income taxes                                                             272             841             628  
                                                                    --------      ----------        --------    

                   Net income                                      $     727           1,250             740  
                                                                    ========      ==========        ========   
</TABLE>

See accompanying notes to consolidated financial statements.


                                       39

<PAGE>
                            RIDGEWOOD FINANCIAL, INC.

                        Consolidated Statements of Equity

                  Years ended December 31, 1998, 1997 and 1996

                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                         Accu-
                                                                                        mulated
                                                                                         other
                                                                                        compre-
                                                                       Retained         hensive           Total
                                                                       earnings          income          equity
                                                                      ----------       ----------      ----------
<S>                                                                <C>                <C>            <C>     
Balance at December 31, 1995                                          $ 14,976              312           15,288  
                                                                       -------          -------         --------
                                                                                                        
Comprehensive income:                                                                                   
    Net income                                                             740               --              740 
    Other comprehensive income - unrealized                                                             
       holding losses on securities arising during                                                      
       the period (net of tax of ($386))                                    --             (688)            (688)
    Less reclassification adjustment for gains                                                          
       in net income (net of tax of $16)                                    --               29               29 
                                                                                                        --------
                   Total comprehensive income                                                                 81 
                                                                       -------          -------         ========
Balance at December 31, 1996                                            15,716             (347)          15,369 
                                                                       -------          -------         --------
                                                                                                        
Comprehensive income:                                                                                   
    Net income                                                           1,250               --            1,250 
    Other comprehensive income - unrealized                                                             
       holding gains on securities arising during                                                       
       the period (net of tax of $317)                                      --              563              563 
    Less reclassification adjustment for gains                                                          
       in net income (net of tax of $6)                                     --               12               12 
                                                                                                        --------
                   Total comprehensive income                                                              1,825 
                                                                       -------          -------         ========
Balance at December 31, 1997                                            16,966              228           17,194 
                                                                       -------          -------         --------
                                                                                                        
Comprehensive income:                                                                                   
    Net income                                                             727               --              727 
    Other comprehensive income - unrealized                                                             
       holding losses on securities arising during                                                      
       the period (net of tax of ($290))                                    --             (514)            (514)
    Less reclassification adjustment for gains                                                          
       in net income (net of tax of $9)                                     --               15               15 
                                                                                                        --------
                   Total comprehensive income                                                                228 
                                                                       -------          -------         ========
Balance at December 31, 1998                                            17,693             (271)          17,422 
                                                                       =======          =======         ========
                                                                                  
</TABLE>

See accompanying notes to consolidated financial statements.


                                       40

<PAGE>


                            RIDGEWOOD FINANCIAL, INC.

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1998, 1997 and 1996

                                 (In thousands)
<TABLE>
<CAPTION>
                                                                              1998        1997         1996
                                                                           ---------    ---------   ---------
<S>                                                                      <C>           <C>         <C>   
Cash flows from operating activities:
    Net income                                                             $    727       1,250         740
    Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
          Depreciation                                                          205         199         148
          Amortization of loan fees                                            (131)       (131)       (174)
          Premiums and discounts on mortgage-backed and
            investment securities                                             1,146         376         194
          Proceeds from loan sales                                              771       3,637         750
          Gain on sale of loans                                                 (21)        (45)        (14)
          Loans originated for resale                                            --        (585)     (4,293)
          Disposal of premises and equipment                                     77          --          -- 
          Gain on sale of securities available for sale                         (24)        (19)        (45)
          Provision for loans losses                                            204          12          12
          Deferred income tax (benefit) expense                                (270)        265          84
          Decrease (increase) in accrued interest receivable                    222         209        (347)
          Decrease (increase) in other assets, net                              126        (298)        (57)
          (Decrease) increase in other liabilities                             (308)       (605)      1,236
                                                                           --------    --------    --------
    Net cash provided by (used in) operating activities                       2,724       4,265      (1,766)
                                                                           --------    --------    --------

Cash flows from investing activities:
    Net  (increase) decrease in first mortgage loans                           (515)      4,660      (9,257)
    Net increase in consumer loans                                             (901)     (2,316)     (2,390)
    Purchase of mortgage-backed securities available for sale               (69,435)    (40,931)    (15,763)
    Principal collected on mortgage-backed securities                        32,316       7,421       5,930
    Proceeds from sales of mortgage-backed securities available for sale         --       6,320       4,967
    Purchase of investment securities available for sale                    (13,642)     (1,503)    (41,447)
    Proceeds from sales of securities available for sale                     10,522      17,525      15,689
    Maturities and calls of investment securities held to maturity            7,896       2,500      11,021
    Maturities and calls of investment securities available for sale         13,200          --          --    
    Principal collected on investment securities                                374          --          --
    Purchase of premises and equipment                                         (247)       (142)       (729)
    Purchase of Federal Home Loan Bank stock                                     --          --        (768)
    Proceeds from collection of loan fees                                        36          20          56
                                                                           --------    --------    --------
                   Net cash used in investing activities                    (20,396)     (6,446)    (32,691)
                                                                           --------    --------    --------

Cash flows from financing activities:
    Net increase in passbook, NOW and money market accounts                   8,483       7,311       2,904
    Net increase in certificates of deposit                                   3,157      16,027      20,629
    Proceeds from borrowed funds                                             31,800      13,407      25,175
    Repayment of borrowed funds                                             (15,525)    (25,525)    (12,786)
    Proceeds from initial public offering subscription payable               17,809          --          -- 
    Net increase (decrease) in advances from
       borrowers for taxes and insurance                                         24          (5)         77
                                                                           --------    --------    --------
                   Net cash provided by financing activities                 45,748      11,215      35,999
                                                                           --------    --------    --------

                   Net increase in cash and cash equivalents                 28,076       9,034       1,542

Cash and cash equivalents at beginning of year                               15,398       6,364       4,822
                                                                           --------    --------    --------
Cash and cash equivalents at end of year                                   $ 43,474      15,398       6,364
                                                                           ========    ========    ========

Supplemental disclosures of cash flow information - cash payments for:
       Interest on deposits and borrowed funds                             $ 11,096      10,386      11,185
                                                                           ========    ========    ========
       Income taxes                                                        $    477         233         548
                                                                           ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       41
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


 (1)   Conversion and Reorganization

       On June 22, 1998, the Board of Directors of Ridgewood Savings Bank of New
       Jersey  (the Bank)  adopted a Plan of  Conversion  to convert  from a New
       Jersey  chartered  mutual  savings bank to a New Jersey  chartered  stock
       savings  bank.  The Bank is now a  wholly-owned  subsidiary  of Ridgewood
       Financial, Inc. (the Company), a holding company formed by the Bank.

       The Company is a savings bank holding  company that was  incorporated  in
       July 1998 under the laws of the State of New  Jersey  for the  purpose of
       acquiring  all of the issued and  outstanding  common  stock of the Bank.
       This  acquisition  occurred  in  January  1999,  at  the  time  the  Bank
       simultaneously  converted from a mutual to stock institution and sold all
       of its  outstanding  capital  stock to the Company.  The Company made its
       initial public offering of common stock and provided additional shares of
       common stock to Ridgewood  Financial,  MHC, a mutual holding company that
       holds  53%  of  the  outstanding  shares  of  the  Company.  Because  the
       reorganization and conversion was not completed until January 7, 1999, at
       December 31, 1998, the Company had no assets, liabilities or equity. As a
       result,  throughout  this report all  references to  operations,  assets,
       liabilities and equity of the Bank include those of the Company.

       The reorganization and conversion,  including the initial public offering
       of the common  stock of the  Company,  was  completed on January 7, 1999,
       resulting in the issuance of 3,180,000 shares of common stock,  $0.10 par
       value per share, of the Company of which 1,494,600 shares (47%) were sold
       at a purchase  price per share of $7.00 and  1,685,400  shares (53%) were
       issued to Ridgewood Financial,  MHC, resulting in gross proceeds of $10.5
       million.  Total expenses were  approximately  $700,000,  resulting in net
       proceeds of $9.8 million.

       Approximately  half of the net proceeds were paid directly by the Company
       to the Bank in return for 100,000 shares of common stock, $2.00 par value
       per share, of the Bank (100% of the issued and outstanding  shares of the
       Bank). In addition,  $200,000 was provided to Ridgewood Financial, MHC by
       the Bank. The remaining net proceeds were retained by the Company.

       Concurrent   with  the   conversion  and   reorganization,   the  Company
       established  an Employee  Stock  Ownership  Plan (ESOP) and a  Restricted
       Stock Plan (RRP) for the benefit of  employees  and  directors.  The ESOP
       will  purchase  8% of the number of shares sold in the  offering,  in the
       open market, using a loan from the Company. The RRP will be submitted for
       stockholder approval. If implemented,  the RRP would purchase up to 4% of
       the number of shares sold in the  offering.  In addition,  a stock option
       plan will be submitted for stockholders' approval. If implemented,  up to
       10% of the number of shares sold in the  offering  would be reserved  for
       issuance through exercise of options for common stock.

       As part of the conversion,  5,000,000 shares of preferred stock at no par
       value were authorized;  however, none were issued. Included in the Bank's
       financial   statements   at  December  31,  1998  was  $17.8  million  of
       subscriptions payable related to the offering.

       Upon a  complete  liquidation  of the  Bank  after  the  conversion,  the
       Company,  as holder of the Bank's  common  stock would be entitled to any
       assets remaining upon a liquidation of the Bank. Each depositor would not
       have a  claim  in  the  assets  of the  Bank.  However,  upon a  complete
       liquidation of the MHC after the conversion,  each depositor would have a
       claim up to the pro rata value of his or her  accounts,  in the assets of
       the MHC  remaining  after  the  claims  of the  creditors  of the MHC are
       satisfied. Depositors who have liquidation rights in the Bank immediately
       prior to the  conversion  will  continue  to have such  rights in the MHC
       after the conversion for so long as they maintain deposit accounts in the
       Bank after the conversion.

                                       42
                                                                     (Continued)
<PAGE>


                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

       Costs incurred that were directly  associated  with the  conversion  were
       deferred as of December 31, 1998 and were  deducted  from the proceeds of
       the shares sold in the conversion in January 1999.


 (2)   Summary of Significant Accounting Policies

       Business Activities

       The  sole  operations  of  the  Company  is the  Bank.  The  Bank  grants
       residential, commercial and consumer loans to, and accepts deposits from,
       customers from three branches  located in  northeastern  New Jersey.  The
       Bank is subject to the  regulations of certain federal and state agencies
       and undergoes periodic examinations by those regulatory authorities.  The
       Bank operates in one segment, community banking.

       Basis of Financial Statement Presentation

       The  consolidated  financial  statements have been prepared in conformity
       with generally accepted accounting principles and include the accounts of
       Ridgewood  Financial,  Inc. and its  wholly-owned  subsidiary,  Ridgewood
       Savings Bank of New Jersey.  All  significant  intercompany  transactions
       have been eliminated. In preparing the consolidated financial statements,
       management is required to make estimates and assumptions  that affect the
       reported  amounts  of  assets  and  liabilities  as of  the  date  of the
       statement  of  financial  condition  and  revenues  and  expenses for the
       period. Actual results could differ significantly from these estimates.

       Material  estimates  that are  particularly  susceptible  to  significant
       change in the near term relate to the  determination of the allowance for
       loan losses and the valuation of real estate  acquired in connection with
       foreclosures   or  in  settlement  of  loans.   In  connection  with  the
       determination  of the  allowance  for loans losses and  valuation of real
       estate owned,  management  generally obtains  independent  appraisals for
       significant properties.

       In June 1998, the FASB issued Statement of Financial Accounting Standards
       (SFAS)  No.  133  "Accounting  for  Derivative  Instruments  and  Hedging
       Activities." SFAS No. 133 establishes  accounting and reporting standards
       for derivative  instruments,  including  certain  derivative  instruments
       embedded in other  contracts,  (collectively  referred to as derivatives)
       and for hedging  activities.  It requires  that an entity  recognize  all
       derivatives as either assets or liabilities in the statement of financial
       position and measure  those  instruments  at fair value.  SFAS No. 133 is
       effective for all fiscal  quarters of fiscal years  beginning  after June
       15,  1999.  Initial  application  of this  Statement  should be as of the
       beginning  of  an  entity's  fiscal  quarter.   On  that  date,   hedging
       relationships  must be designated as new and  documented  pursuant to the
       provisions  of  this  Statement.   Earlier  application  of  all  of  the
       provisions of SFAS No. 133 is encouraged,  but it is permitted only as of
       the  beginning of any fiscal  quarter that begins after  issuance of this
       Statement.   This  Statement  should  not  be  applied  retroactively  to
       financial  statements  of prior  periods.  The Bank does not believe that
       implementation  of SFAS  No.  133  will  have a  material  impact  on its
       financial condition or results of operations

       Cash and Cash Equivalents

       For purposes of the consolidated  statements of cash flows, cash and cash
       equivalents include cash and due from banks and federal funds sold.

                                       43
                                                                     (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

       Investment Securities

       Management  determines the  appropriate  classification  of securities as
       either held to maturity or available for sale at the purchase date.  Debt
       securities that management has the ability and intent to hold to maturity
       are  classified  as held to maturity  and carried at cost,  adjusted  for
       amortization of premiums and accretion of discounts. Other securities are
       classified  as  available  for  sale  and  are  carried  at  fair  value.
       Unrealized  gains  and  losses  on  securities  available  for  sale  are
       recognized as a component of other  comprehensive  income,  net of income
       taxes, which is included in equity.  Premiums and discounts are amortized
       using the level yield method.  The cost of securities  sold is recognized
       using the specific identification method.

       Mortgage-backed Securities

       Management  determines the appropriate  classification of mortgage-backed
       securities  as  either  held to  maturity  or  available  for sale at the
       purchase  date.   Mortgage-backed   securities  represent   participating
       interests in pools of  long-term  first  mortgage  loans  originated  and
       serviced by third parties. Mortgage-backed securities that management has
       the intent and  ability to hold to  maturity  are  classified  as held to
       maturity  and  carried  at  unpaid  principal   balances,   adjusted  for
       unamortized  premiums and unearned discounts.  All other  mortgage-backed
       securities  are  classified as available for sale and are carried at fair
       value.   Unrealized  gains  and  losses  on  mortgage-backed   securities
       available for sale are  recognized as a component of other  comprehensive
       income,  net of income taxes,  which is included in equity.  Premiums and
       discount  are  amortized  using  the  level  yield  method.  The  cost of
       securities sold is determined using the specific identification method.

       Loans Held for Sale

       Loans  originated  and held for sale are  carried at the lower of cost or
       fair value determined on an aggregate  basis.  Net unrealized  losses are
       recognized in a valuation allowance through charges to income.  Gains and
       losses  on the sale of loans  held for  sale  are  determined  using  the
       specific identification method.

       The Bank recognizes  separate assets for the rights to service for others
       mortgage loans that have been acquired  through  purchase or origination.
       These rights are amortized  over the estimated net servicing  life of the
       loans and are  evaluated  for  impairment  based on their fair value on a
       quarterly  basis.  The fair  value of the rights is  estimated  using the
       present value of future cash flows and assumptions  regarding  prepayment
       estimates,  cost  of  servicing,  discount  rates  and  loan  terms.  Any
       impairments  to the value of the rights are recognized as a direct effect
       to amortization.

       Loans Receivable

       Loans  receivable  are  stated  at  unpaid  principal  balances  less the
       allowance  for loans  losses  and net  deferred  loan  origination  fees.
       Interest  income on loans is accrued and  credited to interest  income as
       earned.  Loan  origination and commitment fees are deferred and amortized
       as a yield  adjustment  over the  lives of the  related  loans  using the
       interest method.

       The allowance for loan losses is increased by charges to income through a
       provision  for  loan  losses  and  decreased  by   charge-offs,   net  of
       recoveries.  Management's  periodic  evaluation  of the  adequacy  of the
       allowance is based on the Bank's past loss experience, known and inherent
       risks in the portfolio, adverse situations that may affect the borrower's
       ability to repay,  the estimated  value of any underlying  collateral and
       current economic conditions.

                                       44
                                                                    (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

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

       Loans  are  placed  on  nonaccrual  status  when a loan  is  specifically
       determined to be impaired based on management's periodic evaluation.  Any
       unpaid  interest  previously  accrued  on those  loans is  reversed  from
       income.   Interest  income   generally  is  not  recognized  on  specific
       nonaccrual loans unless the likelihood of further loss is remote and only
       to the extent of interest payments received.

       The  Bank  has  defined  the  population  of  impaired  loans  to be  all
       nonaccrual  and   restructured   commercial   loans,  and  certain  other
       performing  loans considered to be impaired as to principal and interest.
       Impaired  loans are  individually  assessed to determine  that the loan's
       carrying  value is not in excess of the fair value of the  collateral  or
       the present  value of the loan's  expected  future  cash  flows.  Smaller
       balance homogeneous loans that are collectively evaluated for impairment,
       such as residential  mortgage loans and installment  loans,  are excluded
       from the impaired loan portfolio. At December 31, 1998 and 1997, the Bank
       has no impaired loans.

       Premises and Equipment

       Premises and equipment, including leasehold improvements, are recorded at
       cost.  Depreciation is computed using the  straight-line  method over the
       estimated useful lives of the assets.

       Foreclosed Real Estate

       Real  estate  properties   acquired  through  foreclosure  are  initially
       recorded at the lower of  amortized  cost or estimated  fair value,  less
       estimated  costs to sell at the date of  foreclosure.  Costs  relating to
       development and improvements of property are  capitalized,  whereas costs
       relating to the holding of property are expensed.

       Valuations are periodically performed by management, and an allowance for
       losses is  established by a charge to operations if the carrying value of
       a property  exceeds its estimated  fair value,  less  estimated  costs to
       sell.

       Comprehensive Income

       Effective  January 1, 1998,  the Bank adopted the  provisions of SFAS No.
       130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
       for reporting and presentation of comprehensive income and its components
       in a full set of financial statements.  Under SFAS No. 130, comprehensive
       income is  segregated  into net  income and other  comprehensive  income.
       Other comprehensive income includes items previously recorded directly to
       equity,  such as unrealized gains and losses on securities  available for
       sale.

       Comprehensive  income is  presented  in the  consolidated  statements  of
       equity.  SFAS No. 130 requires only  additional  disclosures and does not
       affect the Bank's financial position or results of operations. Prior year
       consolidated  financial  statements have been  reclassified to conform to
       the requirements of SFAS No. 130.

                                       45
                                                                    (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

       Income Taxes

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

       Employee Benefit Plans

       Effective  January 1, 1998,  the Bank adopted the  provisions of SFAS No.
       132,  "Employers  Disclosures  about  Pensions  and Other  Postretirement
       Benefits." SFAS No. 132 revises employers' disclosures about pensions and
       other postretirement benefit plans. SFAS No. 132 revises disclosures only
       and  does  not  affect  the  Bank's  financial  position  or  results  of
       operations.  Prior year consolidated financial statement disclosures have
       been revised to conform to the requirements of SFAS No. 132.

       Reclassifications

       Certain   reclassifications   have   been  made  to  the  1996  and  1997
       consolidated financial statements to conform to the 1998 presentation.


 (3)   Investment Securities

       At December 31, 1998 and 1997, securities held to maturity consist of the
following (in thousands):

<TABLE>
<CAPTION>

                                                                         December 31, 1998
                                                 -------------------------------------------------------------------   
                                                                      Gross            Gross
                                                   Amortized        unrealized       unrealized           Fair
                                                      cost            gains            losses            value
                                                 ---------------  ---------------  ---------------   ---------------   
<S>                                         <C>                  <C>             <C>               <C>
           U.S agencies                       $         1,354               20               --             1,374
                                                 ===============  ===============  ===============   ===============
</TABLE>
<TABLE>
<CAPTION>
                                                                         December 31, 1997
                                                 -------------------------------------------------------------------
                                                                      Gross            Gross
                                                   Amortized        unrealized       unrealized           Fair
                                                      cost            gains            losses            value
                                                 ---------------  ---------------  ---------------   ---------------
<S>                                         <C>                  <C>             <C>               <C>
           U.S Government and
               federal agencies               $         9,666               62               (4)            9,724
                                                 ===============  ===============  ===============   ===============
</TABLE>

       At  December  31,  1998,  securities  of $1.4  million  were  pledged  as
collateral.

                                       46
                                                                     (Continued)
<PAGE>


                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

       At December 31, 1998 and 1997,  securities  available for sale consist of
the following (in thousands):

<TABLE>
<CAPTION>

                                                                         December 31, 1998
                                                 -------------------------------------------------------------------
                                                                         Gross           Gross
                                                     Amortized         unrealized     unrealized         Fair
                                                        cost             gains          losses           value
                                                    -----------         --------       ---------       ----------


<S>                                                <C>                 <C>             <C>             <C>     
           Municipal securities                      $ 13,747              335             (181)           13,901  
           Corporate bonds                              1,516                6               --             1,522
           U. S. agencies                               1,467                1               --             1,468
           Equity securities                                8               22               --                30
                                                      -------            -----           ------          --------

                                                     $ 16,738              364             (181)           16,921
                                                      =======            =====           ======          ========
</TABLE>

<TABLE>
<CAPTION>
                                                                         December 31, 1997
                                                ---------------------------------------------------------------

                                                                         Gross           Gross
                                                     Amortized         unrealized     unrealized         Fair
                                                        cost             gains          losses           value
                                                    -----------         --------       ---------       ----------
<S>                                                <C>                 <C>             <C>             <C>     
           U.S Government and
               federal agencies                      $ 23,697               28              (34)           23,691 
           Municipal securities                         3,091              150               --             3,241
           Equity securities                                8               14               --                22
                                                      -------            -----           -------         --------
                                                     $ 26,796              192              (34)           26,954
                                                      =======            =====           =======         ========
</TABLE>


       The  following  is a  summary  of  maturities  of debt  securities  as of
December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                                         December 31, 1998
                                                 -------------------------------------------------------------------
                                                 -------------------------------------------------------------------
                                                         Securities held              Securities available
                                                           to maturity                     for sale
                                                   ---------------------------  ------------------------------
                                                   Amortized          Fair      Amortized            Fair
                                                      cost            value        cost              value
                                                   ------------    ----------   ----------        -----------
<S>                                            <C>              <C>            <C>              <C>   
           Amounts maturing in:
           One year or less                       $      58            58             --               --  
           After one year through five                                              
               years                                     43            43          3,243            3,243
           After five years through                                                                
               ten years                                659           675            718              721
           After ten years                              594           598         12,769           12,927
                                                    -------        ------         ------          -------

                                                  $   1,354         1,374         16,730           16,891
                                                    =======        ======         ======          =======
</TABLE>


                                     47
                                                                     (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       Expected  maturities  will differ  from  contractual  maturities  because
       borrowers  may  have  the  right to call or  prepay  obligations  with or
       without call or prepayment penalties.

       Proceeds from sales of investment  securities  available for sale and the
       realized  gross  gains and  losses  from those  sales are as follows  (in
       thousands):

<TABLE>
<CAPTION>

                                                                          Years ended December 31
                                                             ------------------------------------------------
                                                                  1998               1997             1996
                                                             ---------------   ---------------  -------------
<S>                                                     <C>                       <C>              <C>        
                Proceeds from sales                       $        10,522           17,525          15,689     
                                                             ===============     ============   =============
                Gross realized gains                      $            24               11              20
                                                             ===============     ============   =============
</TABLE>


 (4)   Mortgage-backed Securities

       At  December  31,  1998  and  1997,  mortgage-backed  securities  held to
maturity consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    December 31, 1998
                                            ------------------------------------------------------------------
                                                                  Gross            Gross
                                               Amortized        unrealized       unrealized    Fair
                                                  cost            gains            losses      value
                                               ----------       ----------       ----------    -----

<S>                                            <C>                <C>        <C>           <C>  
              GNMA                               $ 2,378            36             --          2,414
              FHLMC                                2,333            22             (3)         2,352
              FNMA                                 6,566            85             (8)         6,643
                                                 -------       -------        -------        -------

                                                 $11,277           143            (11)        11,409
                                                 =======       =======        =======        =======
</TABLE>

<TABLE>
<CAPTION>

                                                                    December 31, 1997
                                            ------------------------------------------------------------------
                                                                  Gross         Gross
                                               Amortized        unrealized    unrealized       Fair
                                                  cost            gains         losses         value
                                               ----------       ----------    ----------       -----
<S>                                            <C>                <C>        <C>           <C>  
              GNMA                               $ 3,138            64             (8)         3,194
              FHLMC                                2,902            34             (5)         2,931
              FNMA                                 8,316            97            (16)         8,397
                                                 -------       -------        -------        -------

                                                 $14,356           195            (29)        14,522
                                                 =======       =======        =======        =======
</TABLE>


       At December 31, 1998, securities of $800,000 were pledged as collateral.

                                       48
                                                                     (Continued)
<PAGE>


                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

       At December 31, 1998 and 1997,  mortgage-backed  securities available for
sale consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                                         December 31, 1998
                                                 -------------------------------------------------------------------
                                                                   Gross             Gross
                                                   Amortized     unrealized        unrealized         Fair
                                                      cost          gains            losses           value
                                                   ---------      ----------        ----------        -----
<S>                                            <C>                <C>            <C>             <C>  
               GNMA                                $ 3,845              16              (11)           3,850   
               FHLMC                                36,415             324             (509)          36,231
               FNMA                                 48,737             125             (553)          48,309
                                                   -------         -------          -------          -------

                                                   $88,997             465           (1,073)          88,390
                                                   =======         =======          =======          =======
</TABLE>

<TABLE>
<CAPTION>

                                                                         December 31, 1997
                                                -------------------------------------------------------------------
                                                                   Gross             Gross
                                                   Amortized     unrealized        unrealized         Fair
                                                      cost          gains            losses           value
                                                   ---------      ----------        ----------        -----
<S>                                            <C>                <C>            <C>             <C>  
               GNMA                                $ 1,348              10               --            1,358
               FHLMC                                25,567             165              (70)          25,662
               FNMA                                 22,987             142              (50)          23,079
                                                   -------         -------          -------          -------

                                                   $49,902             317             (120)          50,099
                                                   =======         =======          =======          =======
</TABLE>


       At  December  31,  1998,  securities  of $11.6  million  were  pledged as
collateral.

       The following is a summary of maturities of mortgage-backed securities as
of December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                                         December 31, 1998
                                                 -------------------------------------------------------------------
                                                 -------------------------------------------------------------------
                                                         Securities held                Securities available 
                                                           to maturity                        for sale       
                                                 --------------------------------  ---------------------------------

                                                   Amortized           Fair          Amortized            Fair
                                                      cost            value             cost             value
                                                 ---------------  ---------------  ---------------   ---------------

<S>                                             <C>              <C>            <C>             <C>   
           Amounts maturing in:
           One year or less                        $       --             --            709             708  
           After one year through five                                                            
               years                                       --             --          3,882           3,900
           After five years through                                                               
               ten years                                1,223          1,247         18,693          18,664
           After ten years                             10,054         10,162         65,713          65,118
                                                    ---------       --------       --------        --------

                                                   $   11,277         11,409         88,997          88,390
                                                    =========       ========       ========        ========

</TABLE>

                                       49                            (Continued)
<PAGE>


                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

       Expected  maturities  will differ  from  contractual  maturities  because
       borrowers may have the right to call or prepay  obligations  without call
       or prepayment penalties.

       Proceeds from sales of mortgage-backed  securities available for sale and
       the  realized  gross gains and losses from those sales are as follows (in
       thousands):

<TABLE>
<CAPTION>

                                                                    Years ended December 31
                                                                   -------------------------

                                                                      1997            1996
                                                                   ---------        --------
<S>                                                             <C>              <C>  
                         Proceeds from sales                      $    6,320           4,967
                                                                   =========        ========

                         Gross realized gains                              8              31
                         Gross realized losses                            --              (6)
                                                                   ---------        --------

                                                                  $        8              25
                                                                   =========        ========

</TABLE>

       There  were no sales of  mortgage-backed  securities  available  for sale
during 1998.


 (5)   Loans

       The  following  is a summary of loans as  December  31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>

                                                                         1998               1997
                                                                       -------             -------   
<S>                                                              <C>                     <C>     
           First mortgage loans:                                                          
              Secured by one- to four-family residence              $   88,936              86,140  
              Secured by other property                                  8,032              10,313
                                                                       -------             -------
                             Total first mortgage loans                 96,968              96,453

           Consumer loans:                                                                
              Equity                                                    10,397               9,645
              Lines of credit                                              472                 134
              Education                                                     36                 160
              Loans to depositors, secured by  savings                     260                 350
              Other                                                         25                  --
                                                                       -------             -------

                             Total consumer loans                       11,190              10,289
                                                                       -------             -------

           Less:                                                                          
              Net deferred loan fees                                       315                 409
              Allowance for loan losses                                    822                 618
                                                                       -------             -------

                                                                    $  107,021             105,715
                                                                       =======             =======

           Loans held for sale                                      $       --                 750
                                                                       =======             =======
</TABLE>

                                       50                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


     Activity in the allowance for loan losses for the years ended  December 31,
     1998, 1997 and 1996 is summarized as follows (in thousands):

<TABLE>
<CAPTION>

                                                                    1998             1997             1996
                                                               ---------------  ---------------  ----------------
<S>                                                           <C>                    <C>             <C> 
                Balance at beginning of period                  $   618                606             593 
                Provision charged to income                         204                 12              12
                Charge-offs                                          --                 --              (2)
                Recoveries                                           --                 --               3
                                                                  -----             ------           ------

                Balance at end of period                        $   822                618             606
                                                                  =====             ======           ======
</TABLE>


       The  balance  of  nonaccrual  loans for which  interest  income  has been
       reduced  totals  approximately  $695,000  and $0 at December 31, 1998 and
       1997,  respectively.  Interest income that would have been recorded under
       the original terms of such loans approximated $17,000, $0 and $13,000 for
       the years ended  December 31, 1998,  1997 and 1996,  respectively.  There
       were no commitments  to lend  additional  funds to borrowers  whose loans
       were classified as nonaccrual.


 (6)   Premises and Equipment

       Premises  and  equipment  at December  31, 1998 and 1997  consists of the
following (in thousands):
<TABLE>
<CAPTION>


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

<S>                                                              <C>               <C>
                Land                                                $       527             527
                Building and improvements                                   607             607
                Leasehold improvements                                      798             787
                Furniture, fixtures and equipment                         1,055           1,090
                                                                      ---------       ---------
                                                                          2,987           3,011

                Less accumulated depreciation                               769             758
                                                                      ---------       ---------

                                                                    $     2,218           2,253
                                                                      =========       =========
</TABLE>


 (7)   Federal Home Loan Bank Stock

       The Bank,  as a member of the Federal Home Loan Bank System,  is required
       to maintain an  investment in capital stock of the Federal Home Loan Bank
       of New York (FHLB).  The FHLB of New York paid  dividends at an effective
       rate of 7.2%,  6.6% and 7.6% for the years ended December 31, 1998,  1997
       and 1996, respectively.


                                       51                            (Continued)

<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


 (8)   Deposits

       Deposits at  December  31,  1998 and 1997 are  summarized  as follows (in
thousands):

<TABLE>
<CAPTION>
                                                         1998                                1997
                                              -----------------------------     -------------------------------
                                                                 Weighted                            Weighted
                                                                  average                            average 
                                                 Amount            rate            Amount              rate
                                               ---------         --------         --------           --------

<S>                                          <C>                 <C>            <C>                  <C>  
       Passbook                                $ 31,555            3.01%          $ 27,136             3.01%
       NOW accounts                              15,512            1.83             12,320             1.84
       Money market                               4,504            3.00              3,632             2.98
       Certificate of deposits                  153,958            5.50            150,801             5.66
                                                -------            ----            -------             ----
                                               $205,529                           $193,889
                                                =======                            =======

</TABLE>

       The aggregate  amount of certificate  of deposit  accounts with a minimum
       denomination  of  $100,000  was  approximately  $17.4  million  and $15.6
       million at December 31, 1998 and 1997, respectively.

       At December 31, 1998 and 1997,  scheduled  maturities of  certificates of
deposit are as follows (in thousands):


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

                One year or less                  $  127,031         95,800
                One year to three years               22,162         50,878
                Three years or more                    4,765          4,123
                                                    --------       --------

                                                  $  153,958        150,801
                                                    ========       ========


       Interest  expense on deposits for the years ended December 31, 1998, 1997
and 1996 is summarized as follows (in thousands):


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

                Passbook                          $     948       785      663
                NOW accounts                            252       195      139
                Money market                            123       121      122
                Certificate of deposits               8,441     7,881    6,726
                                                    -------  --------  -------

                                                  $   9,764     8,982    7,650
                                                    =======  ========  =======

                                       52                           (Continued)

<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


 (9)   Borrowed Funds

       Borrowed  funds at December 31, 1998 and 1997 are  summarized  as follows
(in thousands):


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

                Advances from the FHLB                  $  32,557         16,282
                                                         ========       ========


       Pursuant to collateral  agreements with the FHLB, advances are secured by
       all stock in the FHLB and qualifying  first mortgage  loans.  Advances at
       December 31, 1998 have maturity dates as follows (in thousands):


                         2000                 $    2,500
                         2001                      2,000
                         2002                      4,000
                         2003                      5,500
                         2005                      2,000
                         2006                        557
                         2008                     16,000
                                                -----------

                                              $   32,557
                                                ===========


       The interest rates on advances  ranged from 4.65% to 6.76% and from 5.30%
       to 6.85% at  December  31,  1998 and  1997,  respectively.  The  weighted
       average  interest rate on FHLB advances at December 31, 1998 and 1997 was
       5.41%, and 6.00%, respectively.


(10)   Employee Retirement Plans

       Pension Plan

       The Bank has a defined  benefit pension plan covering  substantially  all
       employees.  The benefits are computed  using an average of the employee's
       compensation  for the  highest  five  years  during the last ten years of
       employment.  The Bank  funds an  amount  equal to the  maximum  allowable
       deduction for tax purposes as reported by the Bank's actuary. Plan assets
       consist primarily of mutual funds.

       Supplemental Executive Retirement Plan

       In 1998, the Bank  established a supplemental  executive  retirement plan
       (SERP) for the benefit of its senior officers. The SERP provides that the
       participant  may  receive  additional  retirement  income in  addition to
       benefits payable under the Bank's defined benefit pension plan.  Benefits
       are  calculated as 60% of final average  earnings upon  retirement at age
       65, reduced by benefits  payable under the Bank's defined benefit pension
       plan and Social Security benefits.  Benefits payable prior to age 65 will
       be reduced by 1% per month of early retirement. The SERP is unfunded.

                                       53                            (Continued)

<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       Directors Consultant and Retirement Plan

       In 1998, the Bank established a directors  consultant and retirement plan
       (DRP)  which  provides   retirement   benefits  to  directors   following
       retirement  after age 60 and  completion of at least 10 years of service.
       If a director becomes a consulting  director to the Board upon retirement
       then they will receive a monthly  payment equal to between 50% and 80% of
       the Board fee in  effect  at the date of  retirement  for a period of 120
       months,  such level of  benefits is based upon years of service as of the
       retirement date. The DRP is unfunded.

       The following table shows the funded status of the Bank's defined benefit
       plan, SERP and DRP and the amount reported in the consolidated statements
       of financial condition at December 31, 1998 and 1997 (in thousands):


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

       Change in benefit obligation
       Benefit obligation at beginning of year          $     707          501
       Benefit obligation related to past service
          liability on new plans                              821           --
       Service cost                                           123           67
       Interest cost                                           78           42
       Benefits paid                                          (83)          (1)
       Actuarial loss                                           2           98
                                                        ----------    ---------

       Benefit obligation at end of year                    1,648          707
                                                        ----------    ---------

       Change in plan assets
       Fair value of plan asset at beginning of year          730          549
       Actual return on plan assets                            87           92
       Employer contributions                                  21           90
       Benefits paid                                          (83)          (1)
                                                        ----------    ---------

       Fair value of plan assets at end of year               755          730
                                                        ----------    ---------

       Funded status                                         (893)          23
       Unrecognized gain                                      (32)          --
       Unrecognized past service liability                    773           --
       Other                                                    6           12
                                                        ----------    ---------

       (Accrued pension liability) net pension asset    $    (146)          35
                                                        ==========    =========



                                       54                            (Continued)
<PAGE>


                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

     Weighted average assumptions used to develop the net periodic pension costs
are as follows:
<TABLE>
<CAPTION>
                                                                 1998              1997             1996
                                                            ---------------   ---------------  ---------------

<S>                                                             <C>               <C>              <C> 
                Discount rate                                     6.8%              7.5%             7.5%
                Expected long-term rate of
                    return on assets                              8.0               8.0              8.0
                Rate of increase in compensation
                    levels                                        4.5               5.5              5.5
                                                            ===============   ===============  ===============
</TABLE>


     Listed  below are the  components  of pension  expense  for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
                                                                 1998              1997             1996
                                                            ---------------   ---------------  ---------------

<S>                                                     <C>                            <C>              <C>
                Service cost                             $           123                67               66
                Interest cost                                         78                42               37
                Expected return on plan
                    assets                                           (53)              (47)             (47)
                Unrecognized past service
                    liability                                         54                --               --
                Other components                                      --                 6                3
                                                            ---------------   ---------------  ---------------
                Net periodic pension cost                $           202                68               59
                                                            ===============   ===============  ===============
</TABLE>


       Profit-sharing Plan

       The Bank has a 401(k)  profit-sharing  plan  covering  substantially  all
       employees.  The plan  provides for the Bank to match 50% of an employee's
       contribution up to 4% of an  individual's  salary.  Contributions  to the
       plan  for  the  years  ended  December  31,  1998,  1997  and  1996  were
       approximately $22,000, $20,000 and $19,000, respectively.


(11)   Income Taxes

       Under tax law that existed prior to 1996, the Bank was generally  allowed
       a special bad debt deduction in determining income for tax purposes.  The
       deduction  was  based  on  either a  specified  experience  formula  or a
       percentage of taxable income before such deduction. The experience method
       was used in  preparing  the income tax return for 1995.  Legislation  was
       enacted in August 1996 which  repealed for tax purposes the percentage of
       taxable income bad debt reserve method. As a result,  the Bank will use a
       specific  experience  formula to compute its bad debt  deduction for 1997
       and  1998.  The  legislation  also  requires  the Bank to  recapture  its
       post-1987  net  additions to its tax bad debt reserves for which the Bank
       has accrued a deferred liability.


                                       55                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       Income tax expense for the years ended  December 31, 1998,  1997 and 1996
is summarized as follows (in thousands):


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

           Current:             $
               Federal                 495              532              500
               State                    47               44               44
                                    ---------       ----------      -----------
                                $      542              576              544
                                    =========       ==========      ===========

           Deferred:            $
               Federal                (252)             243               77
               State                   (18)              22                7
                                    ---------       ----------      -----------
                                $     (270)             265               84
                                    =========       ==========      ===========

           Total:               $
               Federal                 243              775              577
               State                    29               66               51
                                    ---------       ----------      -----------
                                $      272              841              628
                                    =========       ==========      ===========


       Total income tax expense  differed from the amounts  computed by applying
       the U.S. federal income tax rates of 34% to income before income taxes as
       a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                            1998           1997         1996
                                                         --------     -----------  -----------
<S>                                                <C>                   <C>          <C>
           Expected income tax expense             $
               at federal tax rate                          340            711          465
           Increase (decrease) in taxes
               resulting from:
                  State income tax, net of
                    federal income tax effect                19             44           33
                  Tax-exempt interest                      (113)           (48)          --
                  Tax bad debt reserve                       --             --          136
                  Other, net                                 26            134           (6)
                                                        ----------    -----------  -----------

                                                   $        272            841          628
                                                        ==========    ===========  ===========
</TABLE>



                                       56                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


     Total income tax expense for the years ended  December  31, 1998,  1997 and
     1996 was allocated as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        1998             1997             1996
                                                                   ---------------  ---------------  ---------------

<S>                                                           <C>                        <C>               <C>
           Income tax expense from operations                  $            272              841              628
           Accumulated other comprehensive
               income - unrealized (loss) gain on
               securities available for sale                               (281)             323             (372)
                                                                   ---------------  ---------------  ---------------

                                                               $             (9)           1,164              256
                                                                   ===============  ===============  ===============
</TABLE>


     The following are the significant  components of the net deferred tax asset
     (liability) at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
                                                                                   1998             1997
                                                                              ---------------  ---------------
<S>                                                                       <C>                         <C>  
                Components of deferred tax asset:
                   Provision for loan losses - book                        $           296              222
                   Loan fees                                                            77               85
                   Interest reserves                                                     6               --
                   Amortization of premiums and discounts
                       on investment securities and mortgage-
                       backed securities                                               224              185
                   Accrued SERP                                                         24               --
                   Other                                                                45               --
                   Unrealized losses on available-for-sale
                       securities                                                      153               --
                                                                              ---------------  ---------------
                                  Total deferred tax asset                             825              492
                                                                              ---------------  ---------------

                Components of deferred tax liability:
                   Depreciation                                                        (40)             (36)
                   Provision for loan losses - tax                                    (360)            (432)
                   Other                                                               (14)             (37)
                   Unrealized gains on available-for-sale securities                    --             (128)
                                                                              ---------------  ---------------
                                  Total deferred tax liability                        (414)            (633)
                                                                              ---------------  ---------------
                                  Net deferred tax asset (liability)                   411             (141)
                                                                              ===============  ===============

                Net state deferred tax asset (liability)                                23              (12)
                Net federal deferred tax asset (liability)                             388             (129)
                                                                              ---------------  ---------------
                                                                           $           411             (141)
                                                                              ===============  ===============

</TABLE>

                                       57                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       Management  has  determined  that it is more likely than not that it will
       realize  the  deferred  tax asset based upon the nature and timing of the
       items listed above. There can be no assurances,  however, that there will
       be no significant  differences  in the future between  taxable income and
       pretax book income if circumstances change. In order to fully realize the
       net deferred  tax asset,  the Bank will need to generate  future  taxable
       income.  Management has projected that the Bank will generate  sufficient
       taxable income to utilize the net deferred tax asset; however,  there can
       be no assurance as to such levels of taxable income generated.

       Retained  earnings  at  December  31, 1998  includes  approximately  $3.1
       million  for which no  provision  for income  taxes has been  made.  This
       amount  represents an allocation of income to bad debt deductions for tax
       purposes  only.  Events that would  result in taxation of these  reserves
       include failure to qualify as a bank for tax purposes;  distributions  in
       complete  or  partial   liquidation;   stock   redemptions;   and  excess
       distributions to shareholders.  Management is not aware of the occurrence
       of any such events.  At December 31, 1998,  the Bank has an  unrecognized
       tax liability of $1.1 million with respect to this reserve.


(12)   Related-party Transactions

       At December 31, 1998 and 1997, the executive  officers and directors have
       approximately   $94,000  and  $121,000,   respectively,   in  outstanding
       residential first mortgage and consumer loans.  Lending transactions with
       related parties are on the same terms as those prevailing at the time for
       comparable  transactions with outside customers.  Activity in the related
       party loan balance for the year ended December 31, 1998 is as follows (in
       thousands).


                         Beginning balance               $           121
                         Additional borrowings                        --
                         Repayments                                   27
                                                            ---------------

                         Ending balance                  $            94
                                                            ===============


(13)   Commitments, Contingencies and Concentrations of Credit Risk

       In the  ordinary  course of  business,  the Bank has various  outstanding
       commitments  that  are not  reflected  in the  accompanying  consolidated
       financial statements.  The principal commitments of the Bank are outlined
       in the following section.

       Lease Commitments

       At  December  31,  1998,  the  Bank is  obligated  under a  noncancelable
       operating  lease  expiring in February  2005 for its office and  drive-in
       facilities  in  Ridgewood,  New  Jersey.  The lease  contains  escalation
       clauses  providing  for  increased  rentals  based upon  increases in the
       consumer  price index and an option to renew for an additional ten years.
       In addition,  the Bank leases a facility in Mahwah,  New Jersey,  under a
       noncancelable  operating  lease  expiring  in  November  2007.  The lease
       contains  an option  to renew for an  additional  eight  years.  Net rent
       expense  exclusive  of real  estate  taxes  under the  operating  leases,
       included in occupancy and equipment expense, was approximately  $166,000,
       $161,000  and $154,000  for the years ended  December 31, 1998,  1997 and
       1996, respectively.


                                       58                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       The  projected  minimum  rental  payments  under the terms of the leases,
       exclusive of the renewal options, are as follows (in thousands):



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

                                 1999                     $            155
                                 2000                                  155
                                 2001                                  155
                                 2002                                  155
                                 2003                                  155
                                 2004 and thereafter                   781
                                                              ---------------
                                                          $          1,556
                                                              ===============



       Real estate  taxes,  insurance  and  maintenance  expenses are  generally
       obligations  of the Bank and,  accordingly,  are not  included as part of
       rental payments.

       Financial Instruments with Off-balance-sheet Risk

       The  Bank  maintains  its  cash  and  cash  equivalents  in bank  deposit
       accounts,  the balances of which, at times, may exceed federally  insured
       limits.  Additionally,  the Bank is a party to financial instruments with
       off-balance-sheet  risk in the  normal  course  of  business  to meet the
       financing needs of its customers.  These financial  instruments primarily
       consist of commitments to extend credit.  These instruments  involve,  to
       varying  degrees,  elements of credit and interest rate risk in excess of
       the amounts recognized in the statements of financial condition.

       The Bank's exposure to credit loss in the event of  nonperformance by the
       other party to the financial instruments for commitments to extend credit
       is represented by the contractual  notional amount of those  instruments.
       The  Bank  uses  the same  credit  policies  in  making  commitments  and
       conditional  obligations  as it does  for  on-balance-sheet  instruments.
       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.  The  Bank  evaluates  each
       customer's  creditworthiness on a case-by-case basis. The amount and type
       of collateral obtained by the Bank upon extension of credit varies and is
       based on management's credit evaluation of the counterparty/customer.


                                       59                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       Loan Commitments

       At December  31,  1998,  the Bank has  outstanding  firm  commitments  to
originate loans as follows (in thousands):


                                          Fixed       Variable
                                           rate         rate           Total
                                      ------------  ------------     --------

   First mortgage loans            $      7,274            2,194        9,468
   Consumer and other loans                 297              653          950
                                      ------------  ------------     --------
                                   $      7,571            2,847       10,418
                                      ============  ============     ========


       Litigation

       In the  normal  course of  business,  the Bank may be a party to  various
       outstanding  legal  proceedings and claims. In the opinion of management,
       the  consolidated  financial  position of the Bank will not be materially
       affected by the outcome of such legal proceedings and claims.

       Concentrations of Credit Risk

       A  substantial  portion  of the  Bank's  loans  are  one- to  four-family
       residential  first  mortgage  loans secured by real estate located in New
       Jersey.  Accordingly,  the collectibility of a substantial portion of the
       Bank's loan  portfolio is  susceptible  to changes in real estate  market
       conditions.


(14)   Recapitalization of Savings Institution Insurance Fund (SAIF)

       On September 30, 1996, legislation was enacted which, among other things,
       imposed  a  special  one-time  assessment  on SAIF  member  institutions,
       including the Bank, to  recapitalize  the SAIF and spread the obligations
       for payment of  Financing  Corporation  (FICO)  bonds across all SAIF and
       Bank  Insurance  Fund  (BIF)  members.   The  Federal  Deposit  Insurance
       Corporation  (FDIC)  special  assessment  levied  amounted  to 65.7 basis
       points on SAIF assessable deposits held as of March 31, 1995. The special
       assessment was recognized in 1996 and was tax deductible. The Bank took a
       charge of $830,000,  before  tax-effect,  as a result of the FDIC special
       assessment.  This  legislation  will eliminate the substantial  disparity
       between the amount that BIF and SAIF member  institutions had been paying
       for deposit insurance premiums.


(15)   Regulatory Matters

       FDIC  regulations  require banks to maintain minimum levels of regulatory
       capital.  Under the  regulations in effect at December 31, 1998, the Bank
       is required to maintain (a) a minimum leverage ratio of Tier 1 capital to
       total adjusted assets of 4.0%, and (b) minimum ratios of Tier 1 and total
       capital to risk-weighted assets of 4.0% and 8.0%, respectively.


                                       60                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       Under its prompt corrective action  regulations,  the FDIC is required to
       take certain supervisory  actions (and may take additional  discretionary
       actions) with respect to an  undercapitalized  institution.  Such actions
       could  have a  direct  material  effect  on the  institution's  financial
       statements.  The regulations establish a framework for the classification
       of  savings   institutions   into  five  categories:   well  capitalized,
       adequately capitalized, undercapitalized, significantly undercapitalized,
       and critically undercapitalized.  Generally, an institution is considered
       well  capitalized if it has a leverage (Tier 1) capital ratio of at least
       5.0%; a Tier 1  risk-based  capital  ratio of at least 6.0%;  and a total
       risk-based capital ratio of at least 10.0%.

       The foregoing  capital ratios are based in part on specific  quantitative
       measures of assets,  liabilities and certain  off-balance-sheet  items as
       calculated under  regulatory  accounting  practices.  Capital amounts and
       classifications  are also subject to  quantitative  judgments by the FDIC
       about capital components, risk weightings and other factors.

       Management  believes  that,  as of December 31, 1998,  the Bank meets all
       capital adequacy  requirements to which it is subject.  Further, the most
       recent  FDIC  notification  categorized  the  Bank as a  well-capitalized
       institution under the prompt corrective  action  regulations.  There have
       been no  conditions  or events since that  notification  that  management
       believes have changed the Bank's capital classification.

       The  following  is a summary of the Bank's  actual  capital  amounts  and
       ratios as of  December  31, 1998 and 1997,  compared to the FDIC  minimum
       capital   adequacy   requirements   and   the   FDIC   requirements   for
       classification as a well-capitalized institution (in thousands).
<TABLE>
<CAPTION>
                                                                                                     To be well
                                                                                                 capitalized under
                                                                         For capital             prompt corrective
                                                Actual                adequacy purposes          action provisions
                                        ------------------------   ------------------------   -------------------------

                                          Amount       Ratio         Amount       Ratio         Amount        Ratio
                                        ----------- ------------   ------------ -----------   ------------ ------------
<S>                                      <C>          <C>           <C>             <C>        <C>            <C> 
       As of December 31, 1998:
           Total capital (to risk-
              weighted assets)           $  18,522      18.57       $   7,977        8.00        $ 9,972       10.00
           Tier 1 (capital to risk-
                weighted assets)            17,690      17.74           3,989        4.00          5,983        6.00
           Tier 1 capital (to average
               assets)                      17,690       6.88          10,286        4.00         12,858        5.00
       As of December 31, 1997:
           Total capital (to risk-
              weighted assets)              17,579      20.42           6,888        8.00          8,610       10.00
           Tier 1 (capital to risk-
                weighted assets)            16,692      19.70           3,444        4.00          5,166        6.00
           Tier 1 capital (to average
               assets)                      16,692       7.59           8,942        4.00         11,178        5.00
                                        =========== ============   ============ ===========   ============ ============
</TABLE>
                                       61                            (Continued)

<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


(16)   Fair Values of Financial Instruments

       The following methods and assumptions were used by the Bank in estimating
its fair value disclosure for financial instruments:

       Cash and Cash Equivalents

       The carrying amounts reported in the consolidated statements of financial
       condition for these assets approximate their fair value.

       Investment Securities (Including Mortgage-backed Securities)

       Fair values for investment securities are based on quoted market prices.

       Loans

       Fair values are estimated using  discounted cash flow analysis,  based on
       interest  rates  currently  being offered for loans with similar terms to
       borrowers of similar credit quality.  Loan fair value  estimates  include
       judgments   regarding   future   expected   loss   experience   and  risk
       characteristics.

       Deposits

       The fair values  disclosed for demand deposits are, by definition,  equal
       to the amount payable on demand at the reporting date. The fair value for
       certificates  of  deposit  is  estimated  using a  discounted  cash  flow
       calculation  that  applies  interest  rates  currently  being  offered on
       certificates of deposit to a schedule of aggregate contractual maturities
       on such time deposits.

       Borrowed Funds

       The fair value of borrowed  funds is estimated  using a  discounted  cash
       flow calculation that applies interest rates currently being offered.

       FHLB Stock

       The fair value of FHLB stock approximates carrying value.

       Off-Balance-Sheet Commitments


       The fair value of  commitments  to extend  credit is estimated  using the
       fees  currently  charged to enter into  similar  arrangements  and is not
       included in the table since it is not significant.


                                       62                            (Continued)
<PAGE>

                            RIDGEWOOD FINANCIAL, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


       The estimated fair values of the Bank's financial instruments at December
31, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                              1998                               1997
                                                 --------------------------------  ---------------------------------

                                                    Carrying           Fair           Carrying            Fair
                                                     amount           value            amount            value
                                                 ---------------  ---------------  ---------------   ---------------
<S>                                                 <C>              <C>              <C>               <C>    
           Assets:
               Cash and cash equivalents             $ 43,474           43,474           15,398            15,398
               Investment securities - HTM              1,354            1,374            9,666             9,724
               Investment securities - AFS             16,921           16,921           26,954            26,954
               Mortgage-backed securities -
                  HTM                                  11,277           11,409           14,356            14,522
               Mortgage-backed securities -
                  AFS                                  88,390           88,390           50,099            50,099
               Loans held for sale                         --               --              750               750
               Loans receivable, net                  107,021          113,380          105,715           108,227
               FHLB stock                               1,949            1,949            1,949             1,949
           Liabilities:
               Deposits                               205,529          206,077          193,889           192,776
               Borrowed funds                          32,557           33,989           16,282            16,300
                                                 ===============  ===============  ===============   ===============
</TABLE>


          The  carrying  amounts  in the  preceding  table are  included  in the
          consolidated  statements of financial  condition  under the applicable
          captions.

       Limitations

          Fair value  estimates are made at a specific  point in time,  based on
          relevant  market  information  and  information  about  the  financial
          instrument.  These  estimates  do not  reflect any premium or discount
          that could result from offering for sale at one time the Bank's entire
          holdings  of a  particular  financial  instrument.  Because  no market
          exists for a significant portion of the Bank's financial  instruments,
          fair value estimates are based on judgments  regarding future expected
          loss experience,  current economic conditions, risk characteristics of
          various financial instruments,  and other factors. These estimates are
          subjective  in  nature  and  involve   uncertainties  and  matters  of
          significant   judgment  and  therefore   cannot  be  determined   with
          precision.  Changes  in  assumptions  could  significantly  affect the
          estimates.

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



                                       63                          

<PAGE>


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

         Not applicable.


                                    PART III

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

         The  following  table  sets  forth  information  with  respect  to  our
directors and executive officers.
                        Age at                                         Current
                     December 31,                            Director   Term
      Directors         1998        Position                  Since   Expires(1)
------------------- ------------- ------------------------- --------- ---------
Susan E. Naruk            45      Director, President and      1991      2000
                                  Chief Executive Officer
Nelson Fiordalisi         51      Director, Executive Vice     1987      2002
                                  President and Chief
                                  Operating Officer
Michael W. Azzara         51      Director                     1989      2000
Jerome Goodman            62      Director                     1989      2000
Bernard J. Hoogland       55      Director                     1992      2002
John Kandravy             63      Director                     1995      2002
Robert S. Monteith        74      Director                     1981      2001
John J. Repetto           74      Director                     1975      2001
Paul W. Thornwall         58      Director                     1995      2001
John Scognamiglio         43      Senior Vice President and     N/A       N/A
                                  Chief Financial Officer
Jean M. Miller            52      Senior Vice President and     N/A       N/A
                                  Chief Lending Officer


     All  directors  of the  Bank  became  directors  of the  Company  upon  its
incorporation in July 1998. All executive officers of the Company obtained their
positions  following the incorporation of the Company in July 1998. The business
experience  for the past  five  years  of each of the  directors  and  executive
officers of the Company is as follows:

     Michael W. Azzara has been a member of the Bank's Board of Directors  since
1989.  Mr. Azzara is the President of The Valley  Hospital and the Valley Health
System, Inc., both in Ridgewood, New Jersey. He is also a member of the board of
directors of Princeton Insurance Co. and Health Care Insurance Co.


                                       64

<PAGE>



     Nelson  Fiordalisi has been a member of the Bank's Board of Directors since
1987 and employed by the Bank since 1986.  Mr.  Fiordalisi is the Executive Vice
President  and Chief  Operating  Officer  of the  Bank.  He is a  trustee,  past
president and co-founder of the Ho-Ho-Kus Education Foundation,  a member of the
Ho-Ho-Kus 300th Anniversary  Committee,  the Ho-Ho-Kus Chamber of Commerce,  and
the Financial Managers Society.

     Jerome  Goodman has been a member of the Bank's  Board of  Directors  since
1989.  Mr. Goodman is a Certified  Public  Accountant and a Partner of Flackman,
Goodman & Potter PA in Ridgewood, New Jersey.

     Bernard  J.  Hoogland  has been a member of the Bank's  Board of  Directors
since 1992.  Mr.  Hoogland is the Vice  President  of  Ridgewood  Associates,  a
securities firm in Paramus, New Jersey.

     John  Kandravy  has been a member of the Bank's  Board of  Directors  since
1995.  Mr.  Kandravy is an attorney  and a Partner of Shanley & Fisher,  P.C. in
Morristown,  New  Jersey.  He is a trustee  and a Vice  Chairman  of The  Valley
Hospital, a trustee of Valley Health System, Inc., and The Forum School, trustee
and the  President of The Forum School  Foundation,  and a trustee of Children's
Aid and Family Services, Inc.

     Robert S. Monteith has been a member of the Bank's Board of Directors since
1981. Mr. Monteith is the past President of the Bank and is now retired. He is a
member  of  the  board  of  associates  of  Sacred  Heart  Hospital,  Allentown,
Pennsylvania.

     Susan E. Naruk has been a member of the  Bank's  Board of  Directors  since
1991. Ms. Naruk has been the President and Chief  Executive  Officer of the Bank
since 1991.  Previously,  she was a senior vice president  with Warwick  Savings
Bank.  Ms. Naruk began her banking  career as a lending  officer in the national
banking group of Citibank,  N.A. and served as a vice  president and team leader
in corporate banking for Chase Manhattan Bank, N.A. She is a member of the board
of  directors  of the YWCA of  Bergen  County,  a  trustee  and the  First  Vice
President  of the Western  Bergen  Mental  Health Care, a trustee of the Bankers
Cooperative  Group  and a member  of the board of  governors  of the New  Jersey
League of Community and Savings Bankers. She is a past President of the Northern
New Jersey Savings League.

     John J. Repetto has been a member of the Bank's  Board of  Directors  since
1975.  Mr.  Repetto  is the  Real  Estate  Manager  for  Marron  Enterprises  in
Ho-Ho-Kus, New Jersey.

     Paul W. Thornwall has been a member of the Bank's Board of Directors  since
1995.  Mr.  Thornwall is an attorney and owner of the Thornwall Law Firm in Glen
Rock, New Jersey. He is the past president of the Ridgewood Rotary Club.

     John  Scognamiglio  is a Senior  Vice  President  and the  Chief  Financial
Officer of the Bank, where he has been employed since 1992. Mr.  Scognamiglio is
a member of St. Mary's Parish Council and the Financial Managers Society.

     Jean M. Miller is a Senior Vice President and the Chief Lending  Officer of
the Bank,  where she has been employed since 1992. Ms. Miller is a member of the
International Credit Council and the Ridgewood Chamber of Commerce.


                                       65

<PAGE>



Meetings and Committees of the Board of Directors

     During the year ended  December  31,  1998,  the board of  directors of the
Company held one regular meeting and one special meeting.

     The board of directors  conducts its business through meetings of the board
and through  activities of its  committees.  During the year ended  December 31,
1998,  the board of directors  of the Company  held one regular  meeting and one
special meeting and the board of directors of the Bank held 12 regular  meetings
and two  special  meetings.  No  director  attended  fewer than 75% of the total
meetings of the board of directors and committees on which such director  served
during the year ended  December 31, 1998.  The Company has standing  nominating,
audit and personnel committees. The Company and the Bank have other committees.

     The nominating committee consists of Directors Monteith, Naruk, Repetto and
Thornwall.  The committee presents its recommendations of nominees for Directors
to the full Board for  nomination.  The Committee met once during the year ended
December 31, 1998.

     The audit committee consists of Directors Goodman,  Monteith and Thornwall.
The audit  committee meets at least  semi-annually  and meets with the Company's
independent  certified  public  accountants  to review the results of the annual
audit and other related  matters.  The audit committee met four times during the
year ended December 31, 1998.

     The  personnel  (compensation)  committee  consists  of  Directors  Azzara,
Hoogland,  Naruk and Thornwall.  The committee meets at least annually to review
the performance and  remuneration of the officers and employees of the Bank. The
committee met three times during the year ended December 31, 1998.

Item 10.  Executive Compensation

Director Compensation

     During 1998 each non-management  director was paid a fee of $1,350 for each
Board  meeting  attended  and each  Director  Emeritus  was paid  $500 per Board
meeting attended.  At the discretion of the Board of Directors,  the position of
Director  Emeritus is filled by former  directors who have retired and no longer
serve  as a  director  because  they are no  longer  willing  or able to  attend
meetings on the basis  expected by the members of the Board of  Directors of the
Bank. A Director  Emeritus is not engaged to work on specific projects but, more
generally,   to  provide  advice  due  to  their  extensive   experience.   Each
non-management  director  member of the loan review  committee  and the property
inspection  committee was paid $50 per respective  committee  meeting  attended.
Directors are not paid a fee for attending any other committee  meetings and are
not paid a fee for attending the Company Board meetings.  The total fees paid to
the directors for the year ended December 31, 1998 were  approximately  $195,000
consisting  of $142,000  in Board fees,  $40,000 in  life/health  insurance  and
$13,000 to the loan committee members.

     Directors   Consultant  and  Retirement  Plan  ("DRP").  The  DRP  provides
retirement  benefits  to  directors  following   retirement  after  age  60  and
completion  of at least 10 years of  service.  If a director  agrees to become a
consulting  director  to our board  upon  retirement,  he or she will  receive a
monthly  payment  equal to between 50% and 80% of the Board fee in effect at the
date of retirement  for a period of 120 months;  such level of benefits is based
upon years of prior service as of the retirement date (i.e.,

                                       66

<PAGE>



50% with 10-15 years,  60% with up to 20 years,  70% with up to 25 years and 80%
with more than 25 years of  service).  Benefits  under our DRP will begin upon a
director's retirement.  In the event there is a change in control, all directors
will be  presumed  to have not less than 10 years of service  and each  director
will receive a lump sum payment  equal to the present  value of future  benefits
payable.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section  16(a)  of  the  1934  Act  requires  the  Company's  officers  and
directors,  and persons who own more than ten  percent of the Common  Stock,  to
file reports of ownership and changes in ownership of the Common Stock, on Forms
3, 4 and 5, with the Securities and Exchange  Commission  ("SEC") and to provide
copies of those Forms 3, 4 and 5 to the Company. The Company is not aware of any
beneficial  owner,  as defined under Section 16(a),  of more than ten percent of
its Common Stock at December 31, 1998.

     Based upon a review of the copies of the forms furnished to the Company, or
written  representations  from  certain  reporting  persons that no Forms 5 were
required,  the Company  believes  that all  Section  16(a)  filing  requirements
applicable  to its officers and  directors  were  complied  with during the 1998
fiscal year.

Executive Compensation

     Summary  Compensation  Table.  The following  table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer, chief
operating officer and chief financial officer for the three years ended December
31, 1998.

                                       67

<PAGE>



                                                   Annual Compensation
                                      ------------------------------------------
                                                       Other Annual   All other
Name and Principal Position                            Compensation Compensation
---------------------------
                              Year     Salary    Bonus       (1)          (2)
                              ----     ------    -----      -----        ----

Susan E. Naruk, President     1998  $163,461  $25,500   $    --       $3,200
and Chief Executive Officer   1997   155,000   25,000        --        3,661
                              1996   125,000   20,000        --        2,946

Nelson Fiordalisi, Executive  1998   117,447   15,500        --        2,692
Vice President and Chief      1997   108,450   15,000        --        2,501
Operating Officer             1996    93,000   12,000        --        2,116

John Scognamiglio, Senior     1998    95,885   13,500        --        2,197
Vice President and Chief      1997    88,000   13,000        --        2,029
Financial Officer             1996    82,700   11,000        --        1,883


--------------------
(1)      The Bank  provides  an  automobile  and  group  term  life for  certain
         officers.  The value of these  benefits  do not  exceed  the  lesser of
         $50,000 or 10% of total salary and bonus.
(2)      Consists of company contributions and matching  contributions under the
         401(k) plan.  Additionally,  the individual  participates  in a defined
         benefit  pension  plan  whereby a  benefit  of up to  33-1/3%  of final
         average earnings is payable at age 65 with 10 or more years of service.
         Also,   each   individual   participates   in  the   SERP   Plan.   See
         "--Supplemental Executive Retirement Plan".

     Employment Agreements.  The Bank has an employment agreement with President
Naruk. Ms. Naruk's base salary under the employment  agreement is $157,500.  The
employment  agreement has a term of three years.  The agreement is terminable by
us for "just  cause" as defined in the  agreement.  If we  terminate  Ms.  Naruk
without just cause,  Ms. Naruk will be entitled to a continuation  of her salary
from the date of termination  through the remaining  term of the agreement.  The
employment  agreement  contains  a  provision  stating  that in the event of the
termination  of employment  in connection  with any change in control of us, Ms.
Naruk will be paid a lump sum amount  equal to 2.999 times her five year average
annual taxable cash compensation. If a payment had been made under the agreement
as of December 31, 1998, the payment would have equaled approximately  $365,000.
The aggregate payment that would have been made to Ms. Naruk would be an expense
to us,  thereby  reducing  our net income and our  capital by that  amount.  The
agreement may be renewed annually by our board of directors upon a determination
of satisfactory  performance  within the board's sole  discretion.  If Ms. Naruk
shall become  disabled  during the term of the agreement,  she shall continue to
receive  payment of 100% of the base  salary for a period of 6 months and 50% of
such base salary for an additional six months. Such payments shall be reduced by
any other benefit  payments made under other  disability  programs in effect for
our employees.  Similar  agreements  have been  implemented for our other senior
officers including Mr. Nelson Fiordalisi,  Executive Vice President and Mr. John
Scognamiglio,  Senior Vice  President.  Payment to each such  individual  upon a
change in control is limited to 200% of the average annual compensation over the
prior 36 month taxable  compensation period. As of December 31, 1998, payment to
Mr.  Fiordalisi and to Mr.  Scognamiglio  would have been $243,000 and $203,000,
respectively, had there been a change in control as of that date.

                                       68

<PAGE>




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

     Persons and groups  owning in excess of 5% of the Common Stock are required
to file certain  reports  regarding  such  ownership  pursuant to the Securities
Exchange Act of 1934, as amended ("1934 Act").  The following  table sets forth,
as of  February  28,  1999,  certain  information  as to those  persons who were
beneficial owners of more than 5% of the outstanding  shares of Common Stock and
as to the Common  Stock  beneficially  owned by certain  executive  officers and
directors of the Company  individually and all executive  officers and directors
as a group.  Management  knows of no persons,  other than those set forth below,
who owned more than 5% of the outstanding shares of Common Stock at February 28,
1999.

                                                               Percent of Shares
                                        Amount and Nature of    of Common Stock
Name and Address of Beneficial Owner   Beneficial Ownership(1)     Outstanding
------------------------------------   -----------------------  ---------------

Ridgewood Financial, MHC                 1,685,400                  53.0%
Susan E. Naruk                              28,571                       (2)
Nelson Fiordalisi                           28,571(3)                    (2)
Michael W. Azzara                            3,300                       (2)
Jerome Goodman                              28,571                       (2)
Bernard J. Hoogland                          1,980                       (2)
John Kandravy                                3,000                       (2)
Robert S. Monteith                           1,000                       (2)
John J. Repetto                              1,428                       (2)
Paul W. Thornwall                            5,239                       (2)
John Scognamiglio                           27,873                       (2)
All Directors and Executive Officers                             
  as a Group (11 Persons)                  142,599(3)                4.5%
                                                                 
------------------------------                                 
(1)  Includes  shares of Common  Stock  held  directly  as well as by spouses or
     minor children,  in trust and other indirect  ownership,  over which shares
     the individuals  effectively  exercise sole or shared voting and investment
     power, unless otherwise indicated.
(2)  Less than 1%.
(3)  Includes 500 shares in the name of a partnership  for which Mr.  Fiordalisi
     is a principal but for which he disclaims beneficial ownership.

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

Transactions with Management and Others

     No  directors,  executive  officers  or  immediate  family  members of such
individuals  were  engaged in  transactions  with the Company or any  subsidiary
involving  more than  $60,000  (other than through a loan) during the year ended
December 31, 1998. Furthermore,  the Bank had no "interlocking" relationships in
which (i) any  executive  officer  is a member of the board of  directors  or of
another entity,  one of whose  executive  officers are a member of the Company's
board of  directors,  or where  (ii) any  executive  officer  is a member of the
compensation  committee of another entity,  one of whose executive officers is a
member of the Company's board of directors.


                                       69

<PAGE>

     The Bank has followed the policy of offering residential mortgage loans for
the financing of personal  residences,  share loans,  and consumer  loans to its
officers,  directors  and  employees.  Loans are made in the ordinary  course of
business and also made on substantially the same terms and conditions, including
interest rate and collateral,  as those of comparable transactions prevailing at
the time with other  persons,  and do not  include  more than the normal risk of
collectibility or present other unfavorable features.

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

         (a) The following documents are filed as a part of this report:

     1. The  following  financial  statements  and the  reports  of  independent
accountants of Registrant are included in this filing under Item 7.

         Independent Auditors' Reports.

         Consolidated Statements of Financial Condition at December 31, 1998 and
1997.

         Consolidated  Statements  of  Income  for each of the two  years in the
period ended December 31, 1998.

         Consolidated  Statements  of  Equity  for each of the two  years in the
period ended December 31, 1998.

         Consolidated  Statements of Cash Flows for each of the two years in the
period ended December 31, 1998.

         Notes to Consolidated Financial Statements.

                  2. Except for Exhibit 27, which is provided is the  submission
to the Commission, no financial statement schedules are required.

                  3. The  following  exhibits  are  included  in this  Report or
                  incorporated herein by reference: (a) List of Exhibits:

                  3(i)     Certificate of Incorporation of Ridgewood Financial,
                           Inc.*

                  3(ii)    Bylaws of Ridgewood Financial, Inc.*

                  10.1     Employment Agreement with S. Naruk*

                  10.2     Employment Agreement with N. Fiordalisi*

                  10.3     Employment Agreement with J. Scognamiglio*


                                       70

<PAGE>



                  10.4     Employment Agreement with J. Miller*

                  10.5     Supplemental Executive Retirement Plan*

                  21       Subsidiaries of the Registrant

                  23       Consent of KPMG LLP

                  27       Financial Data Schedule

     (b) The  Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1998.



*  Incorporated  by  reference  to  the  identically  numbered  exhibit  of  the
Registration  Statement  on Form  SB-2  (File  No.  333-62363)  filed  with  the
Commission on August 27, 1998.

                                       71


<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 as of March 29, 1999 on its
behalf by the undersigned, thereunto duly authorized.

                                    Ridgewood Financial, Inc.




                                    By: /s/ Susan E. Naruk 
                                       ----------------------------------------
                                        Susan E. Naruk
                                        President and Chief
                                        Executive Officer
                                        (duly authorized representative)

     In accordance  with the  Securities  Exchange Act of 1934,  this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities indicated as of March 29, 1999.


/s/ John Scognamiglio                     /s/ Susan E. Naruk    
-------------------------------------     ------------------------------------
John Scognamiglio                         Susan E. Naruk
Senior Vice President and Chief           President, Chief Executive Officer,
Financial Officer                         and Director
(principal financial and accounting       (principal executive officer)
officer)

/s/ Nelson Fiordalisi                     /s/ Bernard J. Hoogland             
-------------------------------------     ------------------------------------
Nelson Fiordalisi                         Bernard J. Hoogland
Senior Vice President, Chief Operating    Director
Officer, and Director


-------------------------------------     ------------------------------------
Michael W. Azzara                         John Kandravy
Director                                  Director

/s/ Jerome Goodman                      
-------------------------------------     ------------------------------------
Jerome Goodman                            Robert S. Monteith
Director                                  Director

/s/ John J. Repetto                       /s/ Paul W. Thornwall
-------------------------------------     ------------------------------------ 
John J. Repetto                           Paul W. Thornwall
Director                                  Director