U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                                   FORM 10-QSB

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

                 For the quarterly period ended September 30, 1996

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

                For the transition period from             to
                                               -----------    ----------
         
                         Commission File Number 0-25884

                             REDWOOD FINANCIAL, INC.
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its Charter)

                                Minnesota                   41-1807233
----------------------------------------------------------------------------
 (State or other jurisdiction of incorporation     (IRS Employer Identification
             or organization)                                Number)

P.O. Box 317, 301 S. Washington St., Redwood Falls, Minnesota     56283-0317
-------------------------------------------------------------     ----------
               (Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code:   (507) 637-8730
                                                      --------------

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

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock as of September 30, 1996:

                 Class                                            Outstanding
                 -----                                            -----------
         Common stock, par value $0. 10 per share                 1,068,750


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                                    CONTENTS

PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>

                                                                                                   Page

       Item 1:     Financial Statements

                   Consolidated Balance Sheets at September 30, 1996 and
<S>                                                                                            <C>
                   June 30, 1996                                                                   3

                   Consolidated Statements of Earnings for the Three
                   Months ended September 30, 1996 and 1995                                        4

                   Consolidated Statement of Stockholders' Equity
                   for the Three Months ended September 30, 1996                                   5

                   Consolidated Statements of Cash Flows for the
                   Three Months ended September 30, 1996 and 1995                                  6

                   Notes to Consolidated Financial Statements                                    7-9

       Item 2:     Management's Discussion and Analysis of
                   Financial Condition and Results of Operations                               10-16

PART II - OTHER INFORMATION

       Item 1:     Legal Proceedings                                                              17

       Item 2:     Changes in Securities                                                          17

       Item 3:     Defaults Upon Senior Securities                                                17

       Item 4:     Submission of Matters to a Vote of Security Holders                            17

       Item 5:     Other Information                                                              17

       Item 6:     Exhibits and Reports on Form 8-K                                               17

       Signatures                                                                                 18

</TABLE>

                                        2

<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                         PART I - FINANCIAL INFORMATION

                          Item 1 - Financial Statements
                           Consolidated Balance Sheets
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                    September 30,       June 30, 
                    Assets                              1996               1996
--------------------------------------------------------------------------------

<S>                                                   <C>              <C>              
Cash                                                  $    15,250          15,345           
Interest-bearing deposits with banks                    2,855,874       2,857,818
---------------------------------------------------------------------------------
            Cash and cash equivalents                   2,871,124       2,873,163
---------------------------------------------------------------------------------
Securities held to maturity:
     Mortgage-backed and related securities            15,392,311      15,805,305
     Investment securities                             14,689,567      15,288,913
---------------------------------------------------------------------------------
      Total securities held to maturity                30,081,878      31,094,218
---------------------------------------------------------------------------------
Loans receivable, net                                  17,229,712      16,513,727
Federal Home Loan Bank stock, at cost                     333,500         333,500
Accrued interest receivable                               404,850         553,856
Premises and equipment, net                                62,311          52,187
Other assets                                               74,900          93,992
---------------------------------------------------------------------------------
                 Total Assets                         $51,058,275      51,514,643
---------------------------------------------------------------------------------
     Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Deposits                                               37,410,421      38,042,529
Advance payments by borrowers for taxes and insurance      94,572          55,686
Accrued expenses and other liabilities                    392,989         259,392
---------------------------------------------------------------------------------
              Total Liabilities                        37,897,982      38,357,607
---------------------------------------------------------------------------------
Common stock ($.10 par value): Authorized and issued
     1,125,000 shares; outstanding 1,068,750 shares       112,500         112,500
Additional paid-in capital                              8,459,605       8,457,017
Retained earnings, subject to certain restrictions      6,080,544       6,118,091
Unearned employee stock ownership plan shares            (579,184)       (595,744)
Unearned management stock bonus plan shares              (371,766)       (393,422)
Treasury stock at cost; 56,250 shares                    (541,406)       (541,406)
---------------------------------------------------------------------------------
          Total Stockholders' Equity                   13,160,293      13,157,036
---------------------------------------------------------------------------------
  Total Liabilities and Stockholders' Equity          $51,058,275      51,514,643
---------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements




                                        3
                                                     
<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                       Consolidated Statements of Earnings
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                             Three months 
                                                          ended September 30,   
                                                          -------------------   
                                                           1996        1995             
--------------------------------------------------------------------------------
Interest income:
<S>                                                   <C>             <C>                        
    Loans receivable                                  $ 363,720         335,406 
    Mortgage-backed and related securities              270,807         176,148
    Investment securities                               226,074         301,338
    Cash equivalents                                     49,160          59,907
--------------------------------------------------------------------------------
               Total interest income                    909,761         872,799

Interest expense on deposits                            507,196         473,995
--------------------------------------------------------------------------------
               Net interest income                      402,565         398,804

Provision for losses on loans                                 0               0
--------------------------------------------------------------------------------
               Net interest income after provision
                 for loan losses                        402,565         398,804

Noninterest income:
     Fees and service charges                            13,974           6,792
     Other                                                  959           8,776
--------------------------------------------------------------------------------
                Total noninterest income                 14,933          15,568

Noninterest expenses:
      Compensation and employee benefits                166,737         141,273
      Advertising                                         3,096           2,576
      Occupancy                                           7,603           6,846
      Federal deposit insurance premiums                 21,340          20,846
      Professional fees                                  35,983          19,255
      Deposit insurance fund assessment                 237,085               0
      Other                                              23,324          14,058
--------------------------------------------------------------------------------
                Total noninterest expense               495,168         204,854
--------------------------------------------------------------------------------
                Earnings (loss) before income taxe      (77,670)        209,518
 
Income tax (benefit) expense                            (40,123)         36,080
--------------------------------------------------------------------------------
                Net (loss) earnings             $       (37,547)        173,438
--------------------------------------------------------------------------------
Net (loss) earnings per common share            $         (0.04)           0.17
--------------------------------------------------------------------------------
Weighted average number of shares outstanding           995,317       1,043,287
--------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements


                                        4

<PAGE>
                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                 Consolidated Statement of Stockholders' Equity
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                      Unearned 
                                                                        Shares       Unearned
                                                                       Employee     Management
                                            Additional                  Stock      Stock Bonus                     Total
                                  Common     Paid in     Retained     Ownership    Recognition     Treasury    Stockholders'
                                   Stock     Capital     Earnings        Plan          Plan         Stock          Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                           <C>            <C>          <C>            <C>           <C>           <C>           <C>       
Balance, June 30, 1996        $    112,500   8,457,017    6,118,091      (595,744)     (393,422)     (541,406)     13,157,036

 Net loss                                0           0      (37,547)            0             0             0         (37,547)

 Earned employee stock
  ownership plan shares                  0       2,588            0        16,560             0             0          19,148

 Earned management 
  stock bonus plan shares                0           0            0             0        21,656             0          21,656
-----------------------------------------------------------------------------------------------------------------------------
Balance,  September 30, 1996  $    112,500   8,459,605    6,080,544      (579,184)     (371,766)     (541,406)     13,160,293
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements        

                                       5


<PAGE>
                     REDWOOD FINANCIAL, INC., AND SUBSIDIARY

                      Consolidated Statement of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                            Three months
                                                                                         ended September 30, 
                                                                                           1996         1995 
----------------------------------------------------------------------------------------------------------------
Operating Activities:                                    
<S>                                                                                  <C>              <C>                       
   Net (loss) earnings                                                               $   (37,547)        173,438                   
   Adjustments to reconcile net earnings (loss) to net cash                           
      provided by operations                                                          
          Depreciation                                                                     4,576           4,100
          Amortization of premiums and discounts on investment                        
              securities, mortgage-backed and related securities                      
              and loans receivable, net                                                   (9,845)        (10,099)
          Decrease in other assets                                                        19,092          33,644
          Decrease (increase) in accrued interest receivable                             149,006         (14,623)
          Increase (decrease) in accrued interest payable                                320,011         302,385
          Amortization of unearned ESOP shares                                            16,560          16,560
          Earned ESOP shares priced above original cost                                    2,588           2,070
          Earned Management Stock Bonus Plan shares                                       21,656               0
          Increase (decrease) in accrued expenses and other liabilities                  133,597        (154,510)
----------------------------------------------------------------------------------------------------------------                
                        Net cash provided by operating activities                       619,694         352,965
                                                                                      
Investing Activities:                                                                 
    Proceeds from maturities of investment securities held to maturity                   600,000               0
    Purchases of investment securities held to maturity                                        0      (2,487,720)
    Purchases of mortgage-backed and related securities held to maturity                       0      (2,891,340)
    Principal collected on mortgage-backed and related securities held to maturity       421,349         400,017
    Decrease (increase) in loans receivable,net                                         (715,149)       (113,868)
    Purchases of premises and equipment                                                  (14,700)              0
----------------------------------------------------------------------------------------------------------------               
                        Net cash provided (used) by investing securities                 291,500      (5,092,911)
                                                                                      
Financing Activities:                                                                 
    Decrease in funds held for stock subscriptions                                             0     (13,127,630)
    Decrease in deferred stock conversion costs                                                0         439,015
    Net decrease in deposits                                                            (952,119)     (1,639,550)
    Increase in advance payments by borrowers for taxes an insurance                      38,886          33,762
    Proceeds from the sale of common stock                                                     0       8,549,361
    Adoption of ESOP                                                                           0        (661,984)
----------------------------------------------------------------------------------------------------------------               
                        Net cash used by financing activities                           (913,233)     (6,407,026)
----------------------------------------------------------------------------------------------------------------               
                        Increase(decrease) in cash and cash equivalents                   (2,039)    (11,146,972)
                                                                                      
                                                                                      
Cash and cash equivalents, beginning of period                                         2,873,163      14,092,665
----------------------------------------------------------------------------------------------------------------         
Cash and cash equivalents, end of period                                              $2,871,124       2,945,693
----------------------------------------------------------------------------------------------------------------
                                                                                      
Supplemental cash flow disclosures:                                                   
    Cash paid for interest                                                            $  187,185         171,610
    Cash paid for income taxes                                                            51,850          36,080
                                                                                      
</TABLE>                                                            
                                                            
See accompanying notes to consolidated financial statements


                                        6




<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                               September 30, 1996
                                   (Unaudited)

(1)  Redwood Financial, Inc.

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

     The Company  commenced a Subscription and Community  Offering of its shares
     (the Offering) in connection  with the conversion of the Association on May
     22, 1995.  The Offering was closed on June 22, 1995 and the  conversion was
     completed July 7, 1995 (see note 5).

(2)  Basis of Presentation

     The accompanying  unaudited consolidated financial statements were prepared
     in accordance  with  instructions  for Form 10-QSB and,  therefore,  do not
     include  all  disclosures  necessary  for a  complete  presentation  of the
     consolidated   balance   sheets,   consolidated   statements  of  earnings,
     consolidated statement of stockholders' equity, and consolidated statements
     of cash flows in conformity with generally accepted accounting  principles.
     However, all adjustments,  consisting only of normal recurring adjustments,
     which  are,  in  the  opinion  of   management,   necessary  for  the  fair
     presentation of the interim  financial  statements have been included.  The
     statement of earning for the three months ended  September  30, 1996 is not
     necessarily  indicative of the results which may be expected for the entire
     year.

     The  material  contained  herein is written with the  presumption  that the
     users of the interim  financial  statements have read or have access to the
     most recent Annual Report on Form 10- KSB of Redwood Financial, Inc., which
     contains  the  latest  audited  financial  statements  and  notes  thereto,
     together with Management's  Discussion and Analysis of Financial  Condition
     and Results of Operations as of June 30, 1996 and for the year then ended.

                                                                     (Continued)

                                        7


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(3)    Earnings Per Share

       Earnings per share are based upon the weighted  average  number of common
       shares and common stock equivalents, if dilutive,  outstanding during the
       period. The only common stock equivalents are stock options. The weighted
       average  number of  common  stock  equivalents  is  calculated  using the
       treasury stock method.

(4)     Regulatory Capital Requirements

        At September  30, 1996,  the  Association  met each of the three current
        minimum regulatory capital requirements.  The following table summarizes
        the Association's regulatory capital position at September 30, 1996:

                                                        Amount      Percent (1)
           -------------------------------------------------------------------
                                                        (dollars in thousands)

            Tangible Capital:
               Actual                                  $ 10,017          20.86%
               Required                                     720           1.50
           -------------------------------------------------------------------
               Excess                                   $ 9,297          19.36%
           -------------------------------------------------------------------

           Core Capital:
               Actual                                   $10,017          20.86%
               Required                                   1,440           3.00
           -------------------------------------------------------------------
               Excess                                   $ 8,577          17.86%
           -------------------------------------------------------------------

           Risk-Based Capital:
               Actual                                   $10,194          70.98%
               Required                                   1,149           8.00
           -------------------------------------------------------------------
               Excess                                   $ 9,045          62.98%
           -------------------------------------------------------------------

           (1)    Tangible and core capital  levels are shown as a percentage of
                  total adjusted assets;  risk-based capital levels are shown as
                  a percentage of risk-weighted assets.

                                                                    (Continued)

                                        8


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(5)    Stockholders' Equity and Stock Conversion

        The Association converted from a federally-chartered  mutual savings and
        loan  association  to  a  federally-chartered  stock  savings  and  loan
        association pursuant to its plan of Conversion which was approved by the
        Association's  members on June 23, 1995.  The conversion was effected on
        July 7, 1995, and resulted in the issuance of 1,125,000 shares of common
        stock (par  value  $.10) at $8.00 per share for a gross  sales  price of
        $9,000,000.   Costs  related  to  conversion  (primarily   underwriters'
        commission,  printing,  and professional  fees) aggregated  $450,639 and
        were deducted to arrive at the net proceeds of  $8,549,361.  The Company
        established an employee stock  ownership  trust which  purchased  82,748
        shares of common stock of the Company at the issuance price of $8.00 per
        share from funds borrowed from the holding company.

                                                                     (Continued)

                                        9

<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

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

General

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

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

Financial Condition

The Company's total assets decreased by $457,000,  or 0.90%, from $51,515,000 at
June 30, 1996 to  $51,058,000  at September  30, 1996.  Changes in the Company's
levels of  assets  reflect a slight  decrease  in the level of public  unit fund
deposits during the quarter ended September 30, 1996.

The   Company's   securities,    which   include   investment   securities   and
mortgage-backed and related securities,  decreased by $1,012,000, or 3.25%, from
$31,094,000  at June 30, 1996 to $30,082,000 at September 30, 1996. The decrease
in the Company's level of securities during the three months ended September 30,
1996 is  attributable  to an  investment  security  maturity  and the  principal
repayments of the Company's mortgage-backed and related securities.

The Company's  loans  receivable,  net,  increased by $716,000,  or 4.34%,  from
$16,514,000  at June 30, 1996 to $17,230,000 at September 30, 1996. The increase
in loans receivable was due to an increase in demand during the quarter for both
first and second (i.e. home equity) mortgage loans.

                                                                     (Continued)

                                       10


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The  Company's  deposits,  including  accrued  interest  payable,  decreased  by
$633,000,  or  1.66%,  from  $38,043,000  at June  30,  1996 to  $37,410,000  at
September 30, 1996. The level of deposits  decreased as a result of fewer public
unit fund deposits at September 30, 1996.

Results of Operations

Net Earnings

The Company  incurred a net loss of $38,000 for the quarter ended  September 30,
1996,  as compared to net earnings of $173,000 for the quarter  ended  September
30, 1995. This represented a decrease of $211,000,  or 121.97%. The decrease was
primarily  attributable  to a $290,000  increase  in  noninterest  expense.  The
increase in noninterest expense includes a $237,000 one-time assessment required
by the federal deposit  insurance  authorities to bring the Savings  Association
Insurance  Fund (SAIF) to parity with the Bank  Insurance Fund (BIF) as a result
of the omnibus  appropriations bill signed by President Clinton on September 30,
1996.  The decrease was also  attributable  to a $37,000  increase,  or 4.24% in
interest income, a $33,000, or 6.96% increase in interest expense, and a $76,000
decrease, or 211.11% in income tax expense.

Net Interest Income

Net interest income increased by $4,000, or 1.00%, from $399,000 for the quarter
ended  September 30, 1995 to $403,000 for the quarter ended  September 30, 1996.
The increase in net interest income primarily  reflects an increase in the ratio
of average interest-earning assets to average interest-bearing  liabilities from
129.79%  for the  quarter  ended  September  30, 1995 to 135.20% for the quarter
ended  September  30,  1996.  This was  partially  offset by a  decrease  in the
Association's  interest rate spread from 2.15% for the quarter  ended  September
30, 1995,  to 1.75% for the quarter ended  September  30, 1996.  The decrease in
interest rate spread,  compared to the same period in the previous  fiscal year,
was due to rising  rates paid on  deposits as well as a decrease in yield on the
Company's loan and investment securities portfolios.

Interest Income

Interest  income was  $910,000 for the quarter  ended  September  30,  1996,  as
compared to $873,000 for the quarter ended  September 30, 1995,  representing an
increase  of $37,000,  or 4.24%.  The  increase  in  interest  income was caused
primarily  by a  $3,410,000,  or  7.12%,  increase  in the  average  balance  of
interest-bearing  assets.  This was partially offset by a decline in the overall
yield on interest earning assets.  For the quarter ended September 30, 1996, the
average  yield on  interest  earning  assets  was 7.09%,  representing  a slight
decline from 7.29% for the quarter ended September 30, 1995.

                                                                     (Continued)

                                       11


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Interest on loans receivable  increased by $28,000, or 8.44%, during the quarter
ended  September 30, 1996, as compared to the quarter ended  September 30, 1995.
Such increase was due to a $1,545,000, or 10.05% increase in the average balance
on loans receivable from $15,377,000 for the quarter ended September 30, 1995 to
$16,922,000 for the quarter ended September 30, 1996. This was partially  offset
by a decline in the average yield on loans receivable from 8.72% for the quarter
ended September 30, 1995 to 8.60% for the quarter ended September 30, 1996.

Interest on  mortgage-backed  and related  securities  increased by $95,000,  or
53.98%,  during the quarter ended September 30, 1996, as compared to the quarter
ended  September 30, 1995.  Such  increase was due to a  $5,396,000,  or 52.77%,
increase in the average balance of  mortgage-backed  and related securities from
$10,225,000  for the quarter  ended  September 30, 1995 to  $15,621,000  for the
quarter  ended  September  30,  1996.  The  increase in the  average  balance of
mortgage-backed  and related  securities  primarily  resulted from a decision to
invest the cash  proceeds  from  maturing  investment  securities  and principal
repayments on existing mortgage-backed securities into other mortgage-backed and
related  securities.  The  increase in interest on  mortgage-backed  and related
securities  is  also  due  to  a  slight   increase  in  the  average  yield  on
mortgage-backed  and  related  securities  from  6.89%  for  the  quarter  ended
September 30, 1995 to 6.93% for the quarter ended September 30, 1996.

Interest on investment  securities,  including FHLB stock, decreased by $75,000,
or 24.92%,  during the quarter  ended  September  30,  1996,  as compared to the
quarter  ended  September  30,  1995.  Such  decrease  was  due  primarily  to a
$4,074,000,  or 21.17%, decrease in the average balance of investment securities
from $19,247,000 for the quarter ended September 30, 1995 to $15,173,000 for the
quarter  ended  September  30,  1996.  The  decline is a result of a decision to
invest cash  proceeds  from the maturity of  investment  securities  into higher
yielding mortgage-backed and related securities. Additionally, this decrease was
affected by a decrease in the average yield on investment securities,  including
FHLB stock, from 6.38% for the quarter ended September 30, 1995 to 5.96% for the
quarter ended September 30, 1996.

Interest Expense

Interest expense  increased by $33,000,  or 6.96%, from $474,000 for the quarter
ended  September 30, 1995 to $507,000 for the quarter ended  September 30, 1996.
The increase in interest expense  resulted from a $1,045,000,  or 2.83% increase
in the  average  balance of deposits  from  $36,922,000  for the  quarter  ended
September 30, 1995 to $37,967,000  for the quarter ended September 30, 1996. The
increase in interest expense is also  attributable to an increase in the average
cost of deposits to 5.34%  during the  quarter  ended  September  30,  1996,  as
compared to 5.14% for the quarter ended  September 30, 1995. The increase in the
average cost of deposits was due to an increase in  prevailing  market  interest
rates during much of 1996.

                                                                     (Continued)

                                       12


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Provision for Loan Losses

The  Company's  provision  for loan  losses  was $0 for the three  months  ended
September  30,  1996 and 1995.  Due to the  consistency  in the size of the loan
portfolio,  the lack of substantive  problem loans (i.e.  few nonaccrual  loans)
during these periods, and stable real estate value in the Company's market area,
management  believed that the allowance for loan losses was adequate  throughout
these  periods.  The  allowance  for loan losses was  maintained  at $213,000 at
September 30, 1996 and 1995. The Company's net loan  charge-offs were $0 for the
quarters ended  September 30, 1996 and 1995. At September 30, 1996 and 1995, the
allowance for loan losses  represented 1.22% and 1.38%,  respectively,  of loans
receivable.  Nonaccrual loans totaled $29,000 and $0, respectively, at September
30, 1996 and 1995.

Noninterest Income

Noninterest  income decreased by $1,000,  or 6.25%, from $16,000 for the quarter
ended  September 30, 1995 to $15,000 for the quarter  ended  September 30, 1996.
The decrease in  noninterest  income was  primarily  due to a $8,000,  or 88.89%
decrease in other noninterest  income.  This was offset by a $7,000, or 100.00%,
increase in various fees and service charges.  The decrease in other noninterest
income was primarily due to a $5,000 gain taken on the  disposition  of an asset
in the  quarter  ended  September  30,  1995.  The  increase in fees and service
charges was a result of higher loan fee income (e.g. loan  origination  fees and
appraisal fees) resulting from the  aforementioned  increase in loan origination
volume.

Noninterest Expense

Noninterest  expense  increased by $290,000,  or 141.46%,  from $205,000 for the
quarter ended September 30, 1995 to $495,000 for the quarter ended September 30,
1996.  The  increase  in total  noninterest  expense  was  primarily  due to the
aforementioned $237,000 one-time deposit insurance fund assessment. In addition,
the  increase  in  noninterest  expense is also  attributable  to a $26,000,  or
18.44%,  increase in  compensation  and employee  benefits from $141,000 for the
quarter ended September 30, 1995 to $167,000 for the quarter ended September 30,
1996, a $17,000,  or 89.47%,  increase in professional fees from $19,000 for the
quarter ended  September 30, 1995 to $36,000 for the quarter ended September 30,
1996,  and a $9,000,  or 64.29%  increase in other expenses from $14,000 for the
quarter ended September 30, 1995, to $23,000 for the quarter ended September 30,
1996. The increase in compensation and employee benefits was attributable to the
amortization of unearned  management  stock bonus plan shares and an increase in
staff during the quarter ended  September 30, 1996. The increase in professional
fees was as a result of increased costs  associated with being a public company.
The slight increase in other expenses represents miscellaneous expenses incurred
during the quarter ended September 30, 1996.

                                                                     (Continued)

                                       13


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

Income Taxes

The Company's income taxes fluctuated by $76,000, or 211.11%, from an income tax
expense of $36,000 for the quarter  ended  September  30, 1995, to an income tax
benefit of $40,000 for the  quarter  ended  September  30,  1996.  The change in
income taxes was due primarily to a decrease in pre-tax earnings of $288,000, or
137.14%,  from pre-tax  earnings of $210,000 for the quarter ended September 30,
1995 to a pre-tax loss of $78,000 for the quarter  ended  September 30, 1996. As
previously  stated,  the Company's  pre-tax loss is due to the one-time  deposit
insurance assessment. The income tax benefit for the quarter ended September 30,
1996 reflects the tax benefit  associated  with the Company's  current  negative
earnings position, at the Company's estimated effective tax rate.

Liquidity and Capital Resources

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

The primary investing  activity of the Company is the purchase of investment and
mortgage-backed and related securities.  During the three months ended September
30, 1996 and 1995,  the Company  purchased  investment and  mortgage-backed  and
related  securities in the amounts of $0, and  $5,379,000,  respectively.  Other
investing activities include originations of loans and investment in FHLB of Des
Moines stock. The primary financing activity of the Company is the attraction of
savings deposits.

The Company has other  sources of  liquidity  if there is a need for funds.  The
Association  has the ability to obtain  advances from the Federal Home Loan Bank
(FHLB) of Des  Moines.  In  addition,  the  Company  maintains  a portion of its
investments in FHLB overnight funds that will be available when needed.

The Company is required to maintain  minimum  levels of liquid assets as defined
by OTS regulations.  This requirement,  which may be changed at the direction of
the OTS depending upon economic  conditions  and deposit flows,  is based upon a
percentage of deposits and short-term borrowings.  The required minimum ratio is
currently  5.0%.  Management of the Company seeks to maintain a relatively  high
level of  liquidity  in  order  to  retain  flexibility  in terms of  investment
opportunities  and deposit pricing.  Because liquid assets generally provide for
lower rates of return,  the  Company's  relatively  high  liquidity  will,  to a
certain extent, result in lower rates of return on assets.

                                                                     (Continued)

                                       14


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

The  Company's  most  liquid  assets  are cash and cash  equivalents,  which are
short-term,  highly liquid  investments  with  original  maturities of less than
three months that are readily  convertible  to known amounts of cash and include
interest-bearing  deposits.  The  levels of these  assets are  dependent  on the
Company's  operating,  financing,  and  investing  activities  during  any given
period.  At  September  30,  1996 and 1995,  cash and cash  equivalents  totaled
$2,871,000 and $2,873,000, respectively.

Recent Developments

(1)    Pending Acquisition

       On  November  4, 1996,  the  Company  executed a letter of intent,  dated
       November  1, 1996,  to acquire  100% of the  outstanding  stock of Olivia
       Bancorporation  (the  Bancorporation)  and 100% of the stock of  American
       State Bank of Olivia,  Minnesota  (the  Bank).  American  State Bank is a
       state chartered  commercial banking  institution with approximately $29.1
       million  in  assets as of  October  31,  1996.  The  Bancorporation  owns
       approximately 97.6% of the outstanding stock of the Bank. The acquisition
       is  subject  to  several  matters  including   negotiating  a  definitive
       agreement and regulatory approval.

(2)    Bank Insurance Fund/Savings Association Insurance Fund Assessment

       As a result of the omnibus  appropriations bill signed September 30, 1996
       by President Clinton, the Company will pay a one-time $237,000 assessment
       to the Federal Deposit Insurance  Corporation  (FDIC).  The assessment is
       intended to bring to parity the fund  insuring  deposits at most  savings
       institutions,  the Savings  Association  Insurance Fund (SAIF),  with the
       fund  insuring  deposits at  commercial  banking  institutions,  the Bank
       Insurance Fund (BIF).  As a result of the one-time  assessment,  the FDIC
       will  substantially  reduce the  premium  assessed  savings  institutions
       insured by the SAIF beginning  January 1, 1997. The Company  expects that
       its deposit  insurance  expense will be reduced from the current 23 basis
       point rate for each dollar of deposits, to approximately 6.4 basis points
       for each dollar of  deposits.  Based upon the current  level of deposits,
       the  Company  expects  that the  legislation  will  reduce the  Company's
       deposit insurance expense by approximately $62,000 per year before taxes.
       In  addition,  the  legislation  also  requires  that the SAIF and BIF be
       merged by January 1, 1999,  provided  that bank and  savings  association
       (i.e. thrift) charters are merged by that date.

                                                                     (Continued)

                                       15


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

(3)    Tax Legislation

       Additional   legislation  was  also  enacted  during  the  quarter  ended
       September  30,  1996,  which  substantially  effects  the  tax  treatment
       afforded savings institutions. This legislation was included in the Small
       Business Job  Protection  Act (SBJPA) of 1996.  As a result of the SBJPA,
       the favorable  tax  treatment  concerning  bad debt  deductions  afforded
       savings  institutions has been eliminated.  Savings  associations will be
       required  to remit to  government  taxing  authorities,  the bad debt tax
       reserves  accumulated  since 1987 owing to this  deduction.  For the most
       part,  savings  institutions  will not be required to remit  pre-1988 bad
       debt  tax  deductions.   However,   if  certain  events  occur,  such  as
       liquidation,  a savings institution may be required to remit the bad debt
       tax reserves accumulated in tax years from 1952 up to and including 1987.
       Nevertheless, savings institutions will be allowed, amongst other powers,
       to  convert to a bank  charter,  diversify  lending,  or be  acquired  by
       another  institution without triggering a recapture of pre-1988 reserves.
       The SBJPA  substantially  equalizes  the tax treatment  afforded  savings
       institutions  and  commercial  banks,  and removes an impediment  towards
       merger of the bank and savings association charters.

       Management of the Company knows of no expected  event which would trigger
       recapture of pre-1988 bad debt  deduction  reserves at the current  time.
       The post-1987  deductions  total  $206,000  which will be remitted to the
       federal taxing  authorities over a six to eight year period.  The Company
       is fully reserved for the reversal of the post-1987 tax deduction, and no
       future earnings impact is expected.

                                                                     (Continued)

                                       16


<PAGE>



                     REDWOOD FINANCIAL, INC. AND SUBSIDIARY

                           PART II - OTHER INFORMATION

ITEM 1:           Legal Proceedings.

                  None.

ITEM 2:           Changes in Securities.

                  Not Applicable.

ITEM 3:           Defaults upon Senior Securities.

                  Not Applicable.

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

                  None

ITEM 5:           Other Information.

                  None.

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

                  During the Quarter ended  December 31, 1996, a Form 8-K (Items
                  5 and 7), dated November 4, 1996, was filed.

                                       17


<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                  REDWOOD FINANCIAL, INC.
                                  Registrant



Date: November 8,1996             /s/ Paul W. Pryor
      ---------------             --------------------------------------------
                                  Paul W. Pryor, President and Chief Executive
                                  Officer (Duly Authorized Officer)



Date: November 8, 1996            /s/ Ardella J. Schlapkohl
      ----------------            --------------------------------------------  
                                  Ardella J. Schlapkohl, (Principal Accounting
                                  Officer)

                                       18